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CFA SALT SOLUTIONS QUESTIONS AND ANSWERS
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CFA SALT SOLUTIONS QUESTIONS AND ANSWERS3 years ago, an investor paid $10,000 to establish a position in a
non-dividend-paying stock. During this time, the stock's annual
returns have been 8%, 3%, and -5%, respectively.
Calculate the investor's holding period return and the position's
terminal value. Correct Answer R = (1 + 0.08) x (1 + 0.03) x (1
+ -0.05) - 1 = 0.0568
R = 5.68%
Terminal value = 1.0568 x 10,000 = 10,568
A 2% annual coupon bond is selling for $101 per $100 par
value. Its final coupon payment will be made at maturity in 3
months. The holding period return for an investor who purchases
this bond today is closest to:
1%
2%
3% Correct Answer An investor would pay $101 today in
exchange for a $2 coupon payment and a $100 principal
repayment. The return over a 3-month holding period is:
HPR = (100 - 101)/101 + (2/101) = 0.0099 = 0.99%, ~ 1%
The $100 par value is the maturity value that will be received at
the end of the 3-month period, so it should be P1 instead of P0.
A company is able to borrow over 5 years at a 5.7% interest rate.
If the nominal risk-free rate is 4% and lenders require premiums
,of 1% for inflation, 0.8% for liquidity, and 0.4% for maturity,
the compensation for the possibility that the company does not
repay the loan is closest to: Correct Answer Remember r = rf +
I+D+L+M
Nominal risk free rate = rf + I = 4%.
I = 1%
L = 0.8%
M= 0.4%
So 5.7 = 4 + D + 0.8 + 0.4, so D = 0.5%
A portfolio has experienced the following annual returns:
30%
40%
−70%
Calculate the arithmetic mean and geometric mean. Correct
Answer Arithmetic mean = (.3 + .4 - .7)/3 = 0
Geometric mean = [(1 + .3)(1 + .4)(1 - .7)]^1/3 - 1 = -0.1827
Geometric mean is always smaller unless all numbers are the
same.
A portfolio manager invests $5000 annually in a security for
four years at the prices shown in the following exhibit:
year 1 = purchase price of security = 62
year 2 = 76
year 3 = 84
year 4 = 90
, The average price is best represented as the
a. harmonic mean of 76.48
b. geometric mean of 77.26
c. arithmetic average of 78 Correct Answer Answer is A.
The two primary uses of the harmonic mean are:
1. To handle a dataset with extreme outliers
2. To determine the average security price when using the cost
averaging technique
The second use applies here.
A USD25 million equity portfolio is financed 20 percent with
debt at a cost of 6 percent annual cost. If that equity portfolio
generates a 10 percent annual total investment return, then the
leveraged return is:
a. 11%
b. 11.2%
c. 13.2% Correct Answer portfolio return/portfolio equity
=
(Rp(Ve + Vb) - Vb(rD)) / Ve
=
Rp + (Vb/Ve)(Rp - rD)
rD = borrowing rate
Rp = return on invested funds
Ve = amount of equity capital
Vb = amount of borrowed funds
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