CFA Level 1 Quant: Rates and Returns with all Correct &
100% Verified Answers |Already Graded A+
1. What premiums/rates add up to the nominal rate of interest of a bond? ✔Correct Answer-1. The
nominal rate of interest= real risk-free rate + inflation rate+ default premium+ liquidity premium+
maturity risk. The real risk-free rate equals a reason to trade off current consumption for future
returns. Also called a time preference.
2. A stock is bought at 20, pays a 1-dollar dividend over the period, and is sold at 22. What is the
holding period return. What is the formula to determine it? ✔Correct Answer-2. 15%. The formula
is holding period return = (end-of-period value/ beginning-of-period value) -1.
So, end of period value equals 22 plus the 1-dollar dividend. The beginning of period value is 20.
23 divided by 20 is 1.15. Subtracting 1 gives 0.15.
3. What is the key difference between the arithmetic mean and geometric mean? Why is geometric
mean important? ✔Correct Answer-3. Geometric mean accounts for compounding returns while
arithmetic does not. Geometric mean is useful for determining investment returns. It is typically a
smaller value than arithmetic and so arithmetic is often not as useful as geometric for portfolio
returns.
4. What is the harmonic mean used for? ✔Correct Answer-4. Harmonic mean is typically used to
determine average cost paid per share. Therefore, it is useful for determining cost-basis. For
example, an investor purchases $1,000 of mutual fund shares each month, and over the last three
months, the prices paid per share were $8, $9, and $10.
What is the average cost per share? The harmonic formula is 3 divided by (1/8+1/9+1/10) = $8.926
per share. In contrast, the arithmetic mean would yield 8+9+10 divided by 3=9.
5.Summarize all four types of means. List them from smallest to largest. ✔Correct Answer-5.
Harmonic<Geometric<Arithmetic. Trimmed/Winsorized means work to reduce the effect of outliers
on a group of means. Harmonic means calculate the average share price per share across a fixed
investment amount. Geometric means calculate mean return while accounting for compounding.
Arithmetic means simply average all inputs without adjustments.
1. Which is a better measure of manager performance: time weighted or money-weighted return?
✔Correct Answer-Time weighted. Money-weighted considers cash inflows and outflows in the return
percentage, which fund managers typically do not have control over
2. How does IRR relate to time-weighted and money-weighted return? ✔Correct Answer-When
calculating a money-weighted return, the IRR is the interest rate that equals the NPV of an
investment and series of cash flows, to zero.
3. What is GIPS and what does it have to do with weight return standards? ✔Correct Answer-
Global investment performance standards. GIPS typically calls for time weighted returns for fund
reporting.
1. What are two steps for calculating an annualized return for a period not expressed in years? Use
this example: An investor buys a 500-day government bill for $970 and redeems it at maturity for
$1,000. What is the investor's annualized return? ✔Correct Answer-1. First, find the holding period
return. = .0309 or 3.09% is the holding period return.
100% Verified Answers |Already Graded A+
1. What premiums/rates add up to the nominal rate of interest of a bond? ✔Correct Answer-1. The
nominal rate of interest= real risk-free rate + inflation rate+ default premium+ liquidity premium+
maturity risk. The real risk-free rate equals a reason to trade off current consumption for future
returns. Also called a time preference.
2. A stock is bought at 20, pays a 1-dollar dividend over the period, and is sold at 22. What is the
holding period return. What is the formula to determine it? ✔Correct Answer-2. 15%. The formula
is holding period return = (end-of-period value/ beginning-of-period value) -1.
So, end of period value equals 22 plus the 1-dollar dividend. The beginning of period value is 20.
23 divided by 20 is 1.15. Subtracting 1 gives 0.15.
3. What is the key difference between the arithmetic mean and geometric mean? Why is geometric
mean important? ✔Correct Answer-3. Geometric mean accounts for compounding returns while
arithmetic does not. Geometric mean is useful for determining investment returns. It is typically a
smaller value than arithmetic and so arithmetic is often not as useful as geometric for portfolio
returns.
4. What is the harmonic mean used for? ✔Correct Answer-4. Harmonic mean is typically used to
determine average cost paid per share. Therefore, it is useful for determining cost-basis. For
example, an investor purchases $1,000 of mutual fund shares each month, and over the last three
months, the prices paid per share were $8, $9, and $10.
What is the average cost per share? The harmonic formula is 3 divided by (1/8+1/9+1/10) = $8.926
per share. In contrast, the arithmetic mean would yield 8+9+10 divided by 3=9.
5.Summarize all four types of means. List them from smallest to largest. ✔Correct Answer-5.
Harmonic<Geometric<Arithmetic. Trimmed/Winsorized means work to reduce the effect of outliers
on a group of means. Harmonic means calculate the average share price per share across a fixed
investment amount. Geometric means calculate mean return while accounting for compounding.
Arithmetic means simply average all inputs without adjustments.
1. Which is a better measure of manager performance: time weighted or money-weighted return?
✔Correct Answer-Time weighted. Money-weighted considers cash inflows and outflows in the return
percentage, which fund managers typically do not have control over
2. How does IRR relate to time-weighted and money-weighted return? ✔Correct Answer-When
calculating a money-weighted return, the IRR is the interest rate that equals the NPV of an
investment and series of cash flows, to zero.
3. What is GIPS and what does it have to do with weight return standards? ✔Correct Answer-
Global investment performance standards. GIPS typically calls for time weighted returns for fund
reporting.
1. What are two steps for calculating an annualized return for a period not expressed in years? Use
this example: An investor buys a 500-day government bill for $970 and redeems it at maturity for
$1,000. What is the investor's annualized return? ✔Correct Answer-1. First, find the holding period
return. = .0309 or 3.09% is the holding period return.
