Question 1

The additional return earned for accepting risk is called the:

Accepted Answer

A)  inflated return. 
B)  capital gains yield. 
C)  real return. 
D)  riskless rate. 
E)  risk premium. 
A)  inflated return. 
B)  capital gains yield. 
C)  real return. 
D)  riskless rate. 
E)  risk premium.

Question 2

Jeremy owns a stock that has historically returned 8.5 percent annually with a standard deviation of 11.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year.

Accepted Answer

A)  20.9 
B)  22.9 
C)  32.2 
D)  42.1 
E)  54.8 
A)  20.9 
B)  22.9 
C)  32.2 
D)  42.1 
E)  54.8

Question 3

Which one of the following statements is correct concerning the dividend yield and the total return?

Accepted Answer

A)  The dividend yield can be zero while the total return must be a positive value. 
B)  The total return can be negative but the dividend yield cannot be negative. 
C)  The total return must be greater than the dividend yield. 
D)  The total return plus the capital gains yield is equal to the dividend yield. 
E)  The dividend yield exceeds the total return when a stock increases in value. 
A)  The dividend yield can be zero while the total return must be a positive value. 
B)  The total return can be negative but the dividend yield cannot be negative. 
C)  The total return must be greater than the dividend yield. 
D)  The total return plus the capital gains yield is equal to the dividend yield. 
E)  The dividend yield exceeds the total return when a stock increases in value.

Question 4

An asset had returns of 6.8, 5.4, 3.6,-4.2, and -1.3 percent, respectively, over the past five years. What is the variance of these returns?

Accepted Answer

A)  .00173 
B)  .00184 
C)  .00216 
D)  .00240 
E)  .00259 
A)  .00173 
B)  .00184 
C)  .00216 
D)  .00240 
E)  .00259

Question 5

A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n):

Accepted Answer

A)  normal distribution. 
B)  variance distribution. 
C)  expected rate of return. 
D)  average geometric return. 
E)  average arithmetic return. 
A)  normal distribution. 
B)  variance distribution. 
C)  expected rate of return. 
D)  average geometric return. 
E)  average arithmetic return.

Question 6

A stock has an average historical risk premium of 6.4 percent. The expected risk-free rate for next year is 2.6 percent. What is the expected rate of return on this stock for next year?

Accepted Answer

A)  6.50 percent 
B)  8.86 percent 
C)  9.00 percent 
D)  9.34 percent 
E)  11.70 percent 
A)  6.50 percent 
B)  8.86 percent 
C)  9.00 percent 
D)  9.34 percent 
E)  11.70 percent

Question 7

The geometric return on an investment is approximately equal to the arithmetic return:

Accepted Answer

A)  plus half the standard deviation. 
B)  plus half the variance. 
C)  minus half the standard deviation. 
D)  minus half the variance. 
E)  divided by two. 
A)  plus half the standard deviation. 
B)  plus half the variance. 
C)  minus half the standard deviation. 
D)  minus half the variance. 
E)  divided by two.

Question 8

The geometric return on an asset over the past 12 years has been 13.47 percent. The arithmetic return over the same period was 13.86 percent. What is the best estimate of the average return on this asset over the next 5 years?

Accepted Answer

A)  13.47 percent 
B)  13.67 percent 
C)  13.72 percent 
D)  13.81 percent 
E)  13.86 percent 
A)  13.47 percent 
B)  13.67 percent 
C)  13.72 percent 
D)  13.81 percent 
E)  13.86 percent

Question 9

Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years. What average annual rate of return should Lisa expect to earn over the next four years?

Accepted Answer

A)  11.38 percent 
B)  11.41 percent 
C)  11.44 percent 
D)  11.47 percent 
E)  11.51 percent 
A)  11.38 percent 
B)  11.41 percent 
C)  11.44 percent 
D)  11.47 percent 
E)  11.51 percent

Question 10

The average compound return earned per year over a multiyear period is called the:

Accepted Answer

A)  total return 
B)  average capital gains yield 
C)  variance 
D)  arithmetic average return 
E)  geometric average return 
A)  total return 
B)  average capital gains yield 
C)  variance 
D)  arithmetic average return 
E)  geometric average return

Question 11

Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, he received a dividend of $0.22 a share and also sold the shares for $42 each. What was his annualized rate of return on this investment?

Accepted Answer

A)  -44.69 percent 
B)  -40.14 percent 
C)  -33.00 percent 
D)  -32.90 percent 
E)  -28.07 percent 
A)  -44.69 percent 
B)  -40.14 percent 
C)  -33.00 percent 
D)  -32.90 percent 
E)  -28.07 percent

Question 12

One year ago, you purchased 400 shares of Southern Cotton at $38.40 a share. During the past year, you received a total of $480 in dividends. Today, you sold your shares for $41.10 a share. What is your total return on this investment?

Accepted Answer

A)  8.79 percent 
B)  9.64 percent 
C)  10.16 percent 
D)  11.64 percent 
E)  12.76 percent 
A)  8.79 percent 
B)  9.64 percent 
C)  10.16 percent 
D)  11.64 percent 
E)  12.76 percent

Question 13

Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:

Accepted Answer

A)  decrease the investment in stocks and increase the investment in bonds. 
B)  replace the corporate bonds with intermediate-term government bonds. 
C)  replace the corporate bonds with Treasury bills. 
D)  increase the standard deviation of the portfolio. 
E)  reduce the expected volatility of the portfolio. 
A)  decrease the investment in stocks and increase the investment in bonds. 
B)  replace the corporate bonds with intermediate-term government bonds. 
C)  replace the corporate bonds with Treasury bills. 
D)  increase the standard deviation of the portfolio. 
E)  reduce the expected volatility of the portfolio.

Question 14

An asset had annual returns of 12, 18, 6, -9, and 5 percent, respectively, for the last five years. What is the variance of these returns?

Accepted Answer

A)  .00810 
B)  .01013 
C)  .01065 
D)  .02038 
E)  .04052 
A)  .00810 
B)  .01013 
C)  .01065 
D)  .02038 
E)  .04052

Question 15

When we refer to the rate of return on an investment, we are generally referring to the:

Accepted Answer

A)  capital gains yield. 
B)  effective annual rate of return. 
C)  total percentage return. 
D)  dividend yield. 
E)  annualized dividend yield. 
A)  capital gains yield. 
B)  effective annual rate of return. 
C)  total percentage return. 
D)  dividend yield. 
E)  annualized dividend yield.

Question 16

Jefferson Mills stock produced returns of 14.8, 22.6, 5.9, and 9.7 percent, respectively, over the past four years. During those same years, U.S. Treasury bills returned 3.8, 4.6, 4.8, and 4.0 percent, respectively, for the same time period. What is the variance of the risk premiums on Jefferson Mills stock for these four years?

Accepted Answer

A)  .00298 
B)  .00196 
C)  .00396 
D)  .00478 
E)  .00528 
A)  .00298 
B)  .00196 
C)  .00396 
D)  .00478 
E)  .00528

Question 17

Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return?

Accepted Answer

A)  arithmetic average return for the period 
B)  geometric average return for the period 
C)  total return for the period divided by N - 1 
D)  arithmetic average return for the period divided by N - 1 
E)  geometric average return for the period divided by N - 1 
A)  arithmetic average return for the period 
B)  geometric average return for the period 
C)  total return for the period divided by N - 1 
D)  arithmetic average return for the period divided by N - 1 
E)  geometric average return for the period divided by N - 1

Question 18

For the period 1926-2009, small-cap stocks outperformed large-cap stocks by a significant amount.
Given this, why do investors still purchase large-cap stocks?

Accepted Answer

Investors continue to purchase large-cap

Question 19

You have been researching a company and have estimated that the firm's stock will sell for $44 a share one year from now. You also estimate the stock will have a dividend yield of 2.18 percent. How much are you willing to pay per share today to purchase this stock if you desire a total return of 15 percent on your investment?

Accepted Answer

A)  $37.55 
B)  $38.00 
C)  $38.24 
D)  $39.00 
E)  $40.20 
A)  $37.55 
B)  $38.00 
C)  $38.24 
D)  $39.00 
E)  $40.20

Question 20

Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2009?

Accepted Answer

A)  only large-company stocks 
B)  both large-company and small-company stocks 
C)  only small-company stocks 
D)  corporate bonds, large-company stocks, and small-company stocks 
E)  No category earned an annual return in excess of 100 percent for any given year during the period. 
A)  only large-company stocks 
B)  both large-company and small-company stocks 
C)  only small-company stocks 
D)  corporate bonds, large-company stocks, and small-company stocks 
E)  No category earned an annual return in excess of 100 percent for any given year during the period.

The additional return earned for accepting risk is called the:

Jeremy owns a stock that has historically returned 8.5 percent annually with a standard deviation of 11.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year.

Which one of the following statements is correct concerning the dividend yield and the total return?

An asset had returns of 6.8, 5.4, 3.6,-4.2, and -1.3 percent, respectively, over the past five years. What is the variance of these returns?

A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n):

A stock has an average historical risk premium of 6.4 percent. The expected risk-free rate for next year is 2.6 percent. What is the expected rate of return on this stock for next year?

The geometric return on an investment is approximately equal to the arithmetic return:

The geometric return on an asset over the past 12 years has been 13.47 percent. The arithmetic return over the same period was 13.86 percent. What is the best estimate of the average return on this asset over the next 5 years?

Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years. What average annual rate of return should Lisa expect to earn over the next four years?

The average compound return earned per year over a multiyear period is called the:

Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, he received a dividend of $0.22 a share and also sold the shares for $42 each. What was his annualized rate of return on this investment?

One year ago, you purchased 400 shares of Southern Cotton at $38.40 a share. During the past year, you received a total of $480 in dividends. Today, you sold your shares for $41.10 a share. What is your total return on this investment?

Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:

An asset had annual returns of 12, 18, 6, -9, and 5 percent, respectively, for the last five years. What is the variance of these returns?

When we refer to the rate of return on an investment, we are generally referring to the:

Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return?

For the period 1926-2009, small-cap stocks outperformed large-cap stocks by a significant amount. Given this, why do investors still purchase large-cap stocks?

Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2009?

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds

Mortgage-Backed Securities

Filters

Exam 1: A Brief History of Risk and Return

The additional return earned for accepting risk is called the:

Jeremy owns a stock that has historically returned 8.5 percent annually with a standard deviation of 11.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year.

Which one of the following statements is correct concerning the dividend yield and the total return?

An asset had returns of 6.8, 5.4, 3.6,-4.2, and -1.3 percent, respectively, over the past five years. What is the variance of these returns?

A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n):

A stock has an average historical risk premium of 6.4 percent. The expected risk-free rate for next year is 2.6 percent. What is the expected rate of return on this stock for next year?

The geometric return on an investment is approximately equal to the arithmetic return:

The geometric return on an asset over the past 12 years has been 13.47 percent. The arithmetic return over the same period was 13.86 percent. What is the best estimate of the average return on this asset over the next 5 years?

Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years. What average annual rate of return should Lisa expect to earn over the next four years?

The average compound return earned per year over a multiyear period is called the:

Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, he received a dividend of $0.22 a share and also sold the shares for $42 each. What was his annualized rate of return on this investment?

One year ago, you purchased 400 shares of Southern Cotton at $38.40 a share. During the past year, you received a total of $480 in dividends. Today, you sold your shares for $41.10 a share. What is your total return on this investment?

Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:

An asset had annual returns of 12, 18, 6, -9, and 5 percent, respectively, for the last five years. What is the variance of these returns?

When we refer to the rate of return on an investment, we are generally referring to the:

Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return?

For the period 1926-2009, small-cap stocks outperformed large-cap stocks by a significant amount. Given this, why do investors still purchase large-cap stocks?

Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2009?

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds

Mortgage-Backed Securities

Filters