Q: Which formula correctly calculates the real rate of return given a nominal rate of return and an inflation rate?

$$1 + \text{real rate of return} = \frac{1 + \text{nominal rate of return}}{1 + \text{inflation rate}}$$

Q: A portfolio consists of 40% in Asset A (return 5%) and 60% in Asset B (return 10%). What is the portfolio's expected return?

$$0.4 \times 5\% + 0.6 \times 10\% = 2\% + 6\% = 8\%$$

Q: If you invest $$50\% in $$gold (expected return $$4\%) $$and $$50\% in $$auto stocks (expected return $$8\%$$), what is your portfolio's expected return?

$$0.5 \times 4\% + 0.5 \times 8\% = 2\% + 4\% = 6\%$$

Question 1

Suppose you purchase a share of stock for $$150, receive a dividend of 3$$, and sell the share for $180 at the end of the year. What is your percentage return on investment?

Accepted Answer

$$\frac{180 - 150 + 3}{150} = \frac{33}{150} = 22\%$$

Question 2

Which formula correctly calculates the real rate of return given a nominal rate of return and an inflation rate?

Accepted Answer

$$1 + 	ext{real rate of return} = \frac{1 + 	ext{nominal rate of return}}{1 + 	ext{inflation rate}}$$

Question 3

If the dividend yield on a stock is 2% and the capital gain yield is 8%, what is the total percentage return?

Accepted Answer

$$2\% + 8\% = 10\%$$

Question 4

Which of the following best describes the Dow Jones Industrial Average (The Dow)?

Accepted Answer

An index measuring the investment performance of a portfolio of 30 'blue chip' stocks.

Question 5

Over the past century, which asset class has provided the highest average annual rate of return?

Accepted Answer

Common stocks

Question 6

Given the following returns for three years: Year 1: 10%, Year 2: -5%, Year 3: 15%. What is the average (arithmetic mean) annual return?

Accepted Answer

$$\frac{10\% + (-5\%) + 15\%}{3} = \frac{20\%}{3} \approx 6.67\%$$

Question 7

Which of the following is a measure of volatility that is calculated as the average value of squared deviations from the mean?

Accepted Answer

Variance

Question 8

If the variance of a portfolio's returns is $$100$$, what is the standard deviation?

Accepted Answer

$$\sqrt{100} = 10$$

Question 9

A portfolio consists of 40% in Asset A (return 5%) and 60% in Asset B (return 10%). What is the portfolio's expected return?

Accepted Answer

$$0.4 	imes 5\% + 0.6 	imes 10\% = 2\% + 6\% = 8\%$$

Question 10

Which type of risk can be reduced by diversification?

Accepted Answer

Specific (diversifiable) risk

Question 11

If the expected return on Treasury bills is 2% and the normal risk premium is 6%, what is the expected market return?

Accepted Answer

$$2\% + 6\% = 8\%$$

Question 12

Which of the following statements about market risk is correct?

Accepted Answer

Market risk affects the overall stock market and cannot be eliminated by diversification.

Question 13

A country has a risk premium of 8%. If the risk-free rate is 3%, what is the expected return for an investment in that country (ignoring other factors)?

Accepted Answer

$$3\% + 8\% = 11\%$$

Question 14

If you invest $$50\% in $$gold (expected return $$4\%) $$and $$50\% in $$auto stocks (expected return $$8\%$$), what is your portfolio's expected return?

Accepted Answer

$$0.5 	imes 4\% + 0.5 	imes 8\% = 2\% + 4\% = 6\%$$

Question 15

Which of the following is NOT a characteristic of systematic (market) risk?

Accepted Answer

It can be eliminated by diversification.

Question 16

If the standard deviation of returns for Stock A is 15% and for Stock B is 10%, which stock is considered riskier based on volatility?

Accepted Answer

Stock A

Question 17

Which of the following best explains why diversification reduces risk?

Accepted Answer

Diversification spreads investments across assets with different specific risks, reducing the impact of any one asset's poor performance.

Question 18

If a portfolio has an expected return of 8% and a standard deviation of 12%, what does the standard deviation represent?

Accepted Answer

The volatility or risk of the portfolio's returns around the expected value.

Question 19

Which of the following is a correct statement about the S&P 500 index?

Accepted Answer

It measures the investment performance of a portfolio of 500 large U.S. stocks.

Rates of Return, Risk Measurement, and Diversification: Financial Accounting Study Notes

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