A portfolio of nondividend-paying stocks earned a geometric mean return of 5% between January 1, 2005, and December 31, 2011. The arithmetic mean return for the same period was 6%. If the market value of the portfolio at the beginning of 2005 was $100,000, what was the market value of the portfolio at the end of 2011? (LO 5-1)
Which of the following statements about the standard deviation is/are true? A standard deviation: (LO 5-2)a. Is the square root of the variance?b. Is denominated in the same units as the original data.c. Can be a positive or a negative number.
Which of the following statements reflects the importance of the asset allocation decision to the investment process? The asset allocation decision: (LO 5-3)a. Helps the investor decide on realistic investment goals.b. Identifies the specific securities to include in a portfolio.c. Determines most of the portfolio’s returns and volatility over time.d. Creates a standard by which to establish an appropriate investment time horizon.
Use the following data in answering CFA Questions 4–6.Investment Expected Return, E(r) Standard Deviation, s1 .12 .302 .15 .503 .2
1 .164 .24 .21Investor “satisfaction” with portfolio increases with expected return and decreases with variance according to the “utility” formula: U = E(r) – ½ A σ2 where A = 4.
Based on the formula for investor satisfaction or “utility,” which investment would you select if you were risk averse with A = 4? (LO 5-4)
Based on the formula above, which investment would you select if you were risk neutral? (LO 5-4)
The variable (A) in the utility formula represents the: (LO 5-4)a. Investor’s return requirement.b. Investor’s aversion to risk.c. Certainty equivalent rate of the portfolio.d. Preference for one unit of return per four units of risk.
Use the following scenario analysis for stocks X and Y to answer CFA Questions 7 through 9.
Bear Market Normal Market Bull Market
Probability .2 .5 .3Stock X -20% 18% 50%Stock Y -15% 20% 10%
What are the expected returns for stocks X and Y ? (LO 5-2)
What are the standard deviations of returns on stocks X and Y ? (LO 5-2)
Assume that of your $10,000 portfolio, you invest $9,000 in stock X and $1,000 in stock Y. What is the expected return on your portfolio? (LO 5-3)