Principles of Investments Class instructor: Le Phong Chau, MSc. Chapter 04 Mutual Funds and Other Investment Companies 1.

Which one of the following invests in a portfolio that is fixed for the life of the fund. a. Mutual fund b. Money market fund c. Managed investment company d. Unit investment trust 2. Advantages of investment companies to investors include all but which one of the following? a. Record keeping and administration b. Low cost diversification c. Professional management d. Guaranteed rates of return 3. Rank the following fund category from most risky to least risky I. Equity growth fund II. Balanced fund III. Equity income fund IV. Money market fund a. IV, I, III, II b. III, II, IV, I c. I, II, III, IV d. I, III, II, IV 4. Which of the following result in a taxable event for investors? I. capital gains distributions from the fund II. dividend distributions from the fund III. unrealized increases in fund NAV a. I only b. II only c. I and II only d. I, II and III 5. Management fees for open-end and closed-end funds, typically range between _____ and _____. a. 0.2%; 1.5% b. 0.2%; 5% c. 2%; 5% d. 2%; 8% 1

6. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. a. Net Asset Value b. Average Asset value c. Gross Asset Value d. Total Asset Value 7. Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $20 million in liabilities, and 40 million shares outstanding. What is the Net Asset Value (NAV) of these shares? a. $12.00 b. $ 9.33 c. $15.45 d. $ 1.50 8. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so the fund buys shares in each S&P 500 company a. In proportion to the market value weight of the firm's equity in the S&P 500 b. In proportion to the price weight of the stock in the S&P 500 c. By purchasing an equal number of shares of each stock in the S&P 500 d. By purchasing an equal dollar amount of shares of each stock in the S&P 500 9. Higher portfolio turnover I. results in greater tax liability for investors II. results in greater trading costs for the fund, which investors have to pay for III. is a characteristic of asset allocation funds a. I only b. II only c. I and II only d. I, II and III 10. A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $18.63 million. This fund's turnover rate was _____. a. 81.37% b. 27.00% c. 18.63% d. 64.51% 11. An open-end fund has a NAV of $15.50 per share. The fund charges a 6% load. What is the offering price? a. $14.57 b. $15.95 2

c. $16.43 d. $16.49

Chapter 05 Risk and Return: Past and Prologue 1. You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was a. 4.00% b. 3.50% c. 7.50% d. 11.00% 2. The ______ measure of returns ignores compounding. a. geometric average b. arithmetic average c. IRR d. dollar weighted 3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions you should calculate the ___________. a. geometric average return b. arithmetic average return c. dollar weighted return d. index return 4. The complete portfolio refers to the investment in __________. a. the risk-free asset b. the risky portfolio c. the risk-free asset and the risky portfolio combined d. the risky portfolio and the index 11. Your timing was good last year. You invested more in your portfolio right before prices went up and you sold right before prices went down. In calculating historical performance measures which one of the following will be the largest? a. dollar weighted return b. geometric average return c. arithmetic average return 5. The arithmetic average of -12%, 15% and 20% is _________. a. 15.67% b. 7.67% 3

c. 11.22% d. 6.45% 6. The geometric average of -12%, 20% and 25% is __________. a. 8.42% b. 11.00% c. 9.70% d. 18.88% 7. An investment earns 10% the first year, 15% the second year and loses 12% the third year. Your total compound return over the three years was _______. a. 41.68% b. 11.32% c. 3.64% d. 13.00% 8. Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in three months. What is the holding period return for this investment? a. 3.01% b. 3.09% c. 12.42% d. 16.71% 9. You have an APR of 7% with continuous compounding. The EAR is ______. a. 7.10% b. 7.15% c. 7.20% d. 7.25% 10. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return and a 30% chance of losing 6%. What is your expected return on this investment? a. 12.8% b. 11.0% c. 8.9% d. 9.2%

Chapter 06 Efficient Diversification 1. Risk that can be eliminated through diversification is called ______ risk. a. Unique b. Firm-specific 4

c. Diversifiable d. All of the above 2. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and _______. a. Asset A b. Asset B c. No risky asset d. Can't tell from the data given 3. The ________ is equal to the square root of the systematic variance divided by the total variance. a. Covariance b. Correlation coefficient c. Standard deviation d. Reward-to-variability ratio 4. Which of the following statistics cannot be negative? a. Covariance b. Variance c. E[r] d. Correlation coefficient 5. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to-variability ratio? a. .40 b. .50 c. .75 d. .80 6. Diversification is most effective when security returns are __________. a. High b. Negatively correlated c. Positively correlated d. Uncorrelated 7. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always __________. a. Equal to the sum of the securities standard deviations b. Equal to -1 c. Equal to 0 d. Greater than 0 5

8. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that a. The returns on the stock and bond portfolio tend to move inversely b. The returns on the stock and bond portfolio tend to vary independently of each other c. The returns on the stock and bond portfolio tend to move together d. The covariance of the stock and bond portfolio will be positive 9. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be _________________. a. More than 18% but less than 24% b. Equal to 18% c. Less than 18% d. Zero 10. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is __________. a. .12 b. .36 c. .60 d. .77 11. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is __________. a. 23.00% b. 19.76% c. 18.45% d. 17.67%