Risk and Return Measures - Answers 1 - 20

  1. "D". This is the definition of a dollar-weighted return. a defines duration, b defines arithmetic return, c is incorrect.
  2. "D". None. a through c describe a dollar weighted return.
  3. "E". The calculation takes the bond's annual coupon in dollars and divides it by the market price.
  4. "D". The tax-equivalent yield is the rate at which the investor is indifferent between it and the tax-exempt yield. The second part of the definition describes the calculation methodology.
  5. "D". The answer to the question has two parts. One is the definition, the other is the calculation which assumes a 3.5% inflation rate.
  6. "C". The description defines when the two rates would be equal.
  7. "E". The answer has two parts: the correct holding period return and the formula for obtaining it.
  8. "E". This two part answer describes the Treynor and Sharpe ratios, respectively.
  9. "C". The answer drives home the point that the investor's marginal tax bracket is a critical ingredient in the TEY calculation.
  10. "B". The question requires calculation of the current yield and the observation that the bond is trading at a premium to ascertain that the yield to maturity will be less than the current yield. One does not need to resort to the IRR function on a financial calculator to answer this question.
  11. "A". All of the other talking points are incorrect.
  12. "D". The two part answer contains the exact response as well as the range into which it falls.
  13. "D". These are textbook definitions of the two concepts.
  14. "E". R2 measures the degree of variability of a dependent variable that is explained by changes in the independent variable, not degree of central tendency.
  15. "C". This is the definition of semivariance.
  16. "A". R2 is a performance attribution tool.
  17. "B". Beta measures market risk and is a subset of total risk which is measured by standard deviation.
  18. "A". This is an application of standard deviation of returns for the area under the bell curve. One takes the return and adds and subtracts the standard deviation percentage from it to obtain the range of dispersion.
  19. "B". Skewness gauges the extent of skew, or the degree of asymmetry of return distributions.
  20. "D". This question asks the candidate to apply the concept of R2.
Answers 21 - 31


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