Deck 10: Risk and Return in Capital Markets

Question 1

You own shares in Yahoo that were purchased at a price of $21 per share.Microsoft has offered to purchase Yahoo and buy your shares at a price of $31 per share.What will be your return if you tender your shares to Microsoft and the deal is completed?

A) 47.62%
B) 33.45%
C) 49.65%
D) 43.34%
E) 37.71%

Answer 1

47.62%

Question 2

Which of the following investments offered the highest overall return over the past fifty years?

A) Treasury bills
B) S&P 500
C) S&P/TSX Composite Index
D) corporate bonds
E) long-term Government of Canada bonds

Answer 2

S&P/TSX Composite Index

Question 3

In Canada over the long term,small stocks on the S&P/TSX have provided the highest return followed by long-term Government of Canada bonds.

Answer 3

True

Question 4

Greg purchased stock in Bear Stearns and Co.at a price of $89 per share.The company was acquired by JP Morgan at a price of $10 per share.What is Greg's return on his investment?

A) -88.76%
B) -96.25%
C) -79.00%
D) -85.45%
E) -90.21%

Question 5

Why must riskier investments offer higher expected returns?

Question 6

Your investment over one year yielded a capital gains yield of 5% and no dividend yield.If the sale price was $119 per share,what was the cost of the investment?

A) $126.25
B) $111.67
C) $113.33
D) $117.25
E) $115.57

Question 7

Suppose you invested $45 in TD Bank one month ago.It paid a dividend of $0.60,and you sold it right after the dividend was paid for $44.90.What was your dividend yield and capital gains yield on the investment?

A) 1.3%, -0.2%
B) -0.2%, 1.3%
C) 1.3%, 1.1%
D) 1.1%, -0.2%
E) 1.1%, 0.2%

Question 8

On average,stocks have delivered higher returns than bonds in the long run.

Question 9

Suppose you invested $150 in Tesla Motors one month ago.It paid a dividend of $1.55,and you sold it right after the dividend was paid for $162.What was your realized return from holding the stock?

A) 6%
B) 1%
C) 9%
D) 8%
E) 7%

Question 10

Stocks with high returns are expected to have

A) high variability.
B) low variability.
C) no relation to variability.
D) inverse relationship with variability.
E) no variability.

Question 11

Which of the following investments had the largest fluctuations in overall return over the past fifty years?

A) S&P/TSX Composite Index
B) S&P 500
C) corporate bonds
D) Treasury bills
E) long-term Government of Canada bonds

Question 12

Suppose you invested $33 in Pfizer one month ago.It paid a dividend of $0.88 and you sold it right after the dividend was paid for $31.14.What was your realized return from holding the stock?

A) 2.7%
B) 8.7%
C) 8.3%
D) -2.9%
E) -5.6%

Question 13

Your investment over one year yielded a capital gains yield of 7% and a dividend yield of 4%.If the sale price was $86 per share,what was the cost of the investment?

A) $79.98
B) $86.00
C) $82.69
D) $77.47
E) $80.37

Question 14

Suppose you invested $98 in the Ishares High Yield Fund (HYG)a month ago.It paid a dividend of $0.47 today and then you sold it for $99.What was your dividend yield and capital gains yield on the investment?

A) 0.45%, 1.09%
B) 0.48%, 1.02%
C) 0.48%, 1.08%
D) 1.02%, 1.12%
E) 0.75%, 0.98%

Question 15

Historically,stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.

A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower
E) higher, similar

Question 16

Which of the following investments offered the lowest overall return over the past fifty years?

A) S&P/TSX Composite Index
B) Treasury bills
C) S&P 500
D) corporate bonds
E) long-term Government of Canada bonds

Question 17

Suppose you invested $55 in CIBC stock one month ago.Today,it paid a dividend of $0.35,and then you sold it for $56.25.What was the return on your investment?

A) 2.9%
B) 2.3%
C) 2.2%
D) 2.8%
E) 1.6%

Question 18

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY)a month ago.It paid a dividend of $0.70 today and then you sold it for $65.What was your return on the investment?

A) 8.25%
B) 9.00%
C) 9.50%
D) 9.75%
E) 10.00%

Question 19

Suppose you invested $7.55 in Big Rock Brewery one month ago.Today,it paid a dividend of $0.10,and then you sold it for $7.35.What was the return on your investment?

A) 1%
B) -1%
C) -1.3%
D) 4.2%
E) 1.1%

Question 20

Investors demand a higher return for investments that have larger fluctuations in values because

A) they do not like risk.
B) they are risk seeking.
C) they invest for the long term.
D) they are more expensive.
E) they have higher transaction costs.

Question 21

Ivanhoe Energy Inc had realized returns of 5.5%,-3.6%,8%,and 7.5% over four quarters.What is the quarterly standard deviation of returns for Ivanhoe?

A) 21.95%
B) 29.26%
C) 5.41%
D) 4.68%
E) 4.35%

Question 22

The standard deviation of returns of: I.small capitalization stocks is higher than that of large capitalization stocks.
II) large capitalization stocks is lower than that of corporate bonds.
III)corporate bonds is higher than that of Treasury bills.
Which statement is true?

A) I and III
B) I, II, and III
C) I and II
D) I only
E) II only

Question 23

Amazon.com stock prices gave a realized return of 5%,-5%,10%,and -10% over four successive quarters.What is the annual realized return for Amazon.com for the year?

A) -1.25%
B) 2.50%
C) 0.00%
D) 1.25%
E) 1.00%

Question 24

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.What was the average compound annual return per year?

A) 7.5%
B) 7.3%
C) 6.8%
D) 7%
E) 6.6%

Question 25

Tesla Motors stock had a realized return of 18%,4%,-12%,and -6% over four successive quarters.What is your annual realized return if you bought Tesla at the beginning of the year and sold it at the end of the year?

A) 1.5%
B) 1%
C) 4%
D) 2.5%
E) 0%

Question 26

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.What is the standard deviation of the index returns over these four years?

A) 131.67%
B) 8.14%
C) 7.27%
D) 9.94%
E) 11.47%

Question 27

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.If you invested $10,000 in the index at the beginning of 2010,what amount would your investment have been worth at the end of 2013?

A) $13,256
B) $13,005
C) $12,908
D) $12.974
E) $14.388

Question 28

You purchased Enron stock at a price of $30 per share.Its price was $20 after six months and the company declared bankruptcy at the end of the next six months.The realized return over the last year is:

A) -99%
B) -75%
C) -150%
D) -100%
E) -125%

Question 29

Your investment over one year had a realized return of 7% and a dividend of $1.25.If the sale price was $36 per share,what was the cost of the investment?

A) $32.15
B) $32.78
C) $33.64
D) $34.81
E) $34.90

Question 30

Ford Motor Company had realized returns of 10%,20%,20%,and 10% over four quarters.What is the quarterly standard deviation of returns for Ford calculated from this sample?

A) 5.77%
B) 5.11%
C) 5.99%
D) 5.00%
E) 6.12%

Question 31

Bombardier Inc had realized returns of -3%,-2%,-5%,and -7% over four quarters.What is the quarterly standard deviation of returns for Bombardier?

A) 1.9%
B) 3.7%
C) 4.9%
D) 2.2%
E) 3.4%

Question 32

The S&P TSX Composite index delivered a return of 14.48%,24.13%,17.26% and 9.83% over four successive years.What is the arithmetic average annual return per year?

A) 16.43%
B) 20.8%
C) 14.48%
D) 18.54%
E) 15.96%

Question 33

Suppose the quarterly arithmetic average return for a stock is 5% per quarter and the stock gives a return of 10% each over the next two quarters.The arithmetic average return over the six quarters is:

A) 9%
B) 6.67%
C) 7.5%
D) 10%
E) 12%

Question 34

The geometric average annual return for a large capitalization stock portfolio is 12% for ten years and 5% per year for the next five years.The geometric average annual return for the entire 15-year period is:

A) 9.95%
B) 9.62%
C) 9.11%
D) 10.23%
E) 10.97%

Question 35

Lululemon Athletica stock had a realized return of 7%,-2%,-3%,and -8% over four successive quarters.What is your annual realized return if you bought Lululemon at the beginning of the year and sold it at the end of the year?

A) -1.5%
B) 21.4%
C) -6%
D) -6.4%
E) 0%

Question 36

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.What is a 95% confidence interval for the 2014 return?

A) 4.2% to 11.47%
B) 7.27% to 11.47%
C) -4.2% to 18.74%
D) -2.67% to 17.21%
E) 6.91% to 7.63%

Question 37

Your investment over one year had a realized return of 9% and a dividend yield of 6%.If the sale price was $45 per share,what was the cost of the investment?

A) $41.28
B) $43.69
C) $44.21
D) $45.00
E) $46.35

Question 38

You purchase a 30-year,zero-coupon bond for a price of $20.The bond will pay back $100 after 30 years and make no interim payments.The annual compounded return (geometric average return)on this investment is:

A) 5.31%
B) 6.54%
C) 4.78%
D) 5.51%
E) 4.96%

Question 39

IGM Realty had a price of $30,$30,$35,$33,and $25 at the end of the last five quarters.If IGM pays a dividend of $2 at the end of each quarter,what is the annual realized return on IGM?

A) 8.61%
B) 7.6%
C) 7.10%
D) 8.09%
E) 8.24%

Question 40

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year.The geometric average annual return is:

A) 9.70%
B) 11.20%
C) 14.96%
D) 15.00%
E) 16.55%

Question 41

Use the table for the question(s) below.
Consider the following price and dividend data for Ford Motor Company:

Assume that you purchased Ford Motor Company stock at the closing price on December 31,2014 and sold it at the closing price on December 30,2015.Your realized annual return is for the year 2015 is closest to:

A) -44.5%
B) -45.1%
C) -47.3%
D) -48.5%
E) -46.3%

Question 42

Use the table for the question(s) below.
Consider the following realized annual returns:

The average annual return over the period 1926-2009 for small stocks is 22.1%,and the standard deviation of returns is 22.1%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

A) 11.1%, 33.2%
B) 0%, 44.2%
C) -22.1%, 44.2%
D) -22.1%, 66.3%
E) -12.5%, 45.7%

Question 43

The probability mass between two standard deviations around the mean for a normal distribution is:

A) 66%
B) 90%
C) 75%
D) 95%
E) 50%

Question 44

Use the table for the question(s) below.
Consider the following price and dividend data for Ford Motor Company:

Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your dividend yield for this period is closest to:

A) -8.15%
B) -8.80%
C) 0.70%
D) 0.75%
E) 1.25%

Question 45

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as:

A) Rannual = (1 + R₁)(1 + R₂)(1 + R₃)(1 + R₄) - 1
B) Rannual = R₁ + R₂ + R₃ + R₄
C) Rannual = (1 + R₁)(1 + R₂)(1 + R₃)(1 + R₄)
D) Rannual =
E)Rannual = (1 + R₁)(1 + R₂)(1 + R₃)(1 + R₄) + 1

Question 46

Use the table for the question(s) below.
Consider the following price and dividend data for Ford Motor Company:

Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your total return rate (yield)for this period is closest to:

A) 0.70%
B) -8.13%
C) -8.80%
D) 0.75%
E) 1.25%

Question 47

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10.5%,and the standard deviation of returns is 18.5%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

A) -18.5%, 18.5%
B) -10%, 10%
C) -26.5%, 47.5%
D) -37%, 37%
E) -8%, 29%

Question 48

Use the table for the question(s) below.
Consider the following price and dividend data for Ford Motor Company:

Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your capital gains rate (yield)for this period is closest to:

A) 0.70%
B) 0.75%
C) -8.80%
D) -8.15%
E) 1.25%

Question 49

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

A) -15%,25%
B) -20%,40%
C) -30%, 50%
D) -30%,40%
E) -10%, 30%

Question 50

The Ishares Bond Index fund (TLT)has a mean and annual standard deviation of returns of 7% and 10%,respectively.What is the 66% confidence interval for the returns on TLT?

A) -5%,10%
B) 7%,10%
C) -3%, 17%
D) -10%,10%
E) -5%, 15%

Question 51

Use the table for the question(s) below.
Consider the following realized annual returns:

The average annual return on the S&P 500 from 1996 to 2005 is closest to:

A) 8.75%
B) 4.00%
C) 7.10%
D) 9.75%
E) 5.85%

Question 52

If asset A's return is exactly two times asset B's return,then following risk return tradeoff,the standard deviation of asset A should be ________ times the standard deviation of asset B.

A) 3
B) 2
C) 1
D) 4
E) 5

Question 53

Use the table for the question(s) below.
Consider the following realized annual returns:

The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 67% confidence interval for 2010 returns?

A) 1.5%,, 22.0%
B) -8.8%, 32.2%
C) -29.3%, 52.7%
D) -29.3%, 73.2%
E) -12.6%, 29.8%

Question 54

Use the table for the question(s) below.
Consider the following realized annual returns:

The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

A) 1.5%,, 22.0%
B) -8.8%, 32.2%
C) -29.3%, 52.7%
D) -29.3%, 73.2%
E) -14.4%, 26.2%

Question 55

What are the two components of realized return from a stock investment?

Question 56

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 12%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

A) -28%, 52%
B) -10%,40%
C) -20%,35%
D) -15%, 35%
E) -5%, 25%

Question 57

Use the table for the question(s) below.
Consider the following realized annual returns:

The average annual return on IBM from 1996 to 2005 is closest to:

A) 18.2%
B) 16.40%
C) 18.7%
D) 29.9%
E) 20.24%

Question 58

If the returns on a stock index can be characterized by a normal distribution with mean 12%,the probability that returns will be lower than 12% over the next period equals:

A) 50%
B) 25%
C) 46%
D) 33%
E) 70%

Question 59

Which type of investment has historically had the highest volatility?

Question 60

Treasury bill returns are 5%,4%,3%,and 6% over four years.The standard deviation of returns of Treasury bills is:

A) 1.51%
B) 1.11%
C) 1.00%
D) 1.29%
E) 1.43%

Question 61

A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio,because the independent risks are averaged out.This is also referred to as diversification of risks.

Question 62

When looking at investment portfolios historically,was there a pattern between returns and volatility?

Question 63

Stocks have both diversifiable risk and undiversifiable risk,but only diversifiable risk is rewarded with higher expected returns.

Question 64

Which of the following statements is true?

A) On average, smaller stocks have lower volatility than Treasury bills.
B) Portfolios of smaller stocks are typically less volatile than individual small stocks.
C) On average, smaller stocks have lower returns than larger stocks.
D) On average, Treasury bills have higher returns than world stocks.
E) Portfolios of large stocks are typically more volatile than individual small stocks.

Question 65

Investors should earn a risk premium for bearing unsystematic risk.

Question 66

For large portfolios,investors should expect a higher return for higher volatility,but this does not hold true for individual stocks.

Question 67

Use the information for the question(s) below.
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income for Little Cure. The probability of the FDA approving a drug is 50%.
What is the expected payoff for Big Cure's Blockbuster drug?

A) $100 million
B) $0
C) $1 billion
D) $500 million
E) $50 million

Question 68

There is an overall relationship between ________ and ________-larger stocks have a lower volatility overall.

A) size, risk
B) mean, standard deviation
C) risk aversion, size
D) volatility, mean
E) return, size

Question 69

A stock whose return does not depend on overall economic conditions has a low systematic risk.

Question 70

Risk that is linked across outcomes is called

A) diversifiable risk.
B) common risk.
C) uncorrelated risk.
D) independent risk.
E) systematic risk.

Question 71

Which type of investment has historically had the lowest volatility?

Question 72

Is volatility a reasonable measure of risk when evaluating the investment in a single stock?

Question 73

There is a clear link between the volatility of returns for individual stocks and and the returns for individual stocks.

Question 74

Is volatility a reasonable measure of risk when evaluating large portfolios?

Question 75

Historical evidence on the returns of large portfolios of stock and bonds shows that investments with higher volatility have rewarded investors with higher returns.

Question 76

While ________ seems to be a reasonable measure of risk when evaluating a large portfolio,the ________ of an individual security does not explain the size of its average return.

A) volatility, volatility
B) the mean return, standard deviation
C) mode, volatility
D) volatility, compound annual return
E) volatility, mean return

Question 77

The risk that inflation rates are likely to increase in the next year is an example of common risk.

Question 78

Use the information for the question(s) below.
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income for Little Cure. The probability of the FDA approving a drug is 50%.
What is the expected payoff for Little Cure's ten drugs?

A) $500 million
B) $100 million
C) $1 billion
D) $0
E) $50 million

Question 79

Independent risks can be diversified by holding a large number of uncorrelated assets with independent risks.

Question 80

Rational investors may be willing to choose an investment that has additional risk but does not offer additional reward.