Exam 4: Return and Risk

Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what average annual rate did the price of the stock increase over the 5 year period?

Historical returns are of no use in estimating the risk of an investment.

It is not possible for the nominal risk-free rate of return to be lower than the rate of inflation.

Alexis bought a stock for $34 a share two years ago. The stock does not pay any dividends. Today she sold the stock for $28.50 a share. What was her internal rate of return on this investment?

David has purchased an investment that he expects to produce an annual cash flow of $3,000 for five years. He requires an 8% rate of return compounded annually. What is the maximum amount that David can pay and still earn the required rate of return?

Samantha bought a stock one year ago for $66 a share. She received a total of $2.00 in dividends. Today she sold the stock for $70 a share. Which one of the following statements is correct concerning this investment?

Liquidity risk is defined as the risk of

Lower risk investments are associated with lower expected rates of return.

An investor who requires a 7% rate of return should be willing to pay $934.58 now to receive $1,000 at the end of one year.

Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much money will be in the account at the end of the second year?

The maximum rate of return that can be earned for a given rate of interest occurs when interest is compounded

Over the long term, which one of the following has historically had the lowest average annual rate of return?

Briefly explain the holding period return (HPR) and give several characteristics of this measure.

The expected rate of return and standard deviations, respectively for four stocks are given below: OPQ 11%, 8% RST 11%, 9% UVW 12%, 10% XYZ 12%, 8% Which stock is clearly most desirable?

The Sorka Corp. has paid annual dividends of $0.60, $0.63, $0.65, $0.68 and $0.72, respectively, over the past five years. What is the dividend growth rate?

The yield is the rate of return that causes a project to have a zero net present value.

In response to the same external force, the return on one investment may increase while the return on another investment may decrease.

Six years ago, Miguel invested $3,500. Today his investment is worth $5659. The yield on this investment is

Explain the relationship between risk, the expected rate of return and the actual rate of return.

Lauren purchased a stock for $28 a share and sold it six months later for $31. While she owned the stock, Lauren received two quarterly dividends of $0.35 per share. Brittany's holding period return on this stock is