CFA Level 1 Quant Rates and Returns Exam ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
with accurate detailed answers
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1. What premiums/rates add up to the nominal rate of interest of a bond?
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1. The nominal rate of interest= real risk-free rate + inflation rate+ default premium+
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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.
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2. A stock is bought at 20, pays a 1-dollar dividend over the period, and is sold at 22. What
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is the holding period return. What is the formula to determine it?
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2. 15%. The formula is holding period return = (end-of-period value/ beginning-of-period
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value) -1. ||\\//||
So, end of period value equals 22 plus the 1-dollar dividend. The beginning of period value
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is 20. ||\\//||
23 divided by 20 is 1.15. Subtracting 1 gives 0.15.
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3. What is the key difference between the arithmetic mean and geometric mean? Why is
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geometric mean important? ||\\//|| ||\\//||
3. Geometric mean accounts for compounding returns while arithmetic does not.
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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.
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We have an expert-written solution to this problem!
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4. What is the harmonic mean used for?
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4. Harmonic mean is typically used to determine average cost paid per share. Therefore, it is
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useful for determining cost-basis. For example, an investor purchases $1,000 of mutual
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fund shares each month, and over the last three months, the prices paid per share were $8,
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$9, and $10. ||\\//|| ||\\//||
What is the average cost per share? The harmonic formula is 3 divided by (1/8+1/9+1/10)
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= $8.926 per share. In contrast, the arithmetic mean would yield 8+9+10 divided by 3=9.
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with accurate detailed answers
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1. What premiums/rates add up to the nominal rate of interest of a bond?
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1. The nominal rate of interest= real risk-free rate + inflation rate+ default premium+
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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.
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2. A stock is bought at 20, pays a 1-dollar dividend over the period, and is sold at 22. What
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is the holding period return. What is the formula to determine it?
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2. 15%. The formula is holding period return = (end-of-period value/ beginning-of-period
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value) -1. ||\\//||
So, end of period value equals 22 plus the 1-dollar dividend. The beginning of period value
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is 20. ||\\//||
23 divided by 20 is 1.15. Subtracting 1 gives 0.15.
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3. What is the key difference between the arithmetic mean and geometric mean? Why is
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geometric mean important? ||\\//|| ||\\//||
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.
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
We have an expert-written solution to this problem!
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4. What is the harmonic mean used for?
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4. Harmonic mean is typically used to determine average cost paid per share. Therefore, it is
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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,
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$9, and $10. ||\\//|| ||\\//||
What is the average cost per share? The harmonic formula is 3 divided by (1/8+1/9+1/10)
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= $8.926 per share. In contrast, the arithmetic mean would yield 8+9+10 divided by 3=9.
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