Deck 10: Risk and Return: Lessons From Market History

Question 1

The capital gains yield plus the dividend yield on a security is called the:

A) variance of returns.
B) geometric return.
C) average period return.
D) current yield.
E) total return.

Answer 1

total return.

Question 2

The average compound return earned per year over a multi-year period is called the _____ average return.

A) arithmetic
B) standard
C) variant
D) geometric
E) real

Answer 2

geometric

Question 3

Over the period of 1926 through 2011,the annual rate of return on _____ has been more volatile than the annual rate of return on _____.

A) large company stocks; small company stocks
B) U.S. Treasury bills; small company stocks
C) U.S. Treasury bills; long-term government bonds
D) long-term corporate bonds; small company stocks
E) large company stocks; long-term corporate bonds

Answer 3

large company stocks; long-term corporate bonds

Question 4

The average annual return on small company stocks was about _____ percentage points greater than the average annual return on large-company stocks over the period of 1926 to 2011.

A) 3
B) 5
C) 7
D) 9
E) 11

Question 5

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

A) geometric average return.
B) inflation premium.
C) risk premium.
D) time premium.
E) arithmetic average return.

Question 6

Which one of the following is a correct statement concerning risk premium?

A) The greater the volatility of returns, the greater the risk premium.
B) The lower the volatility of returns, the greater the risk premium.
C) The lower the average rate of return, the greater the risk premium.
D) The risk premium is not correlated to the average rate of return.
E) The risk premium is not affected by the volatility of returns.

Question 7

The excess return required from a risky asset over that required from a risk-free asset is called the:

A) risk premium.
B) geometric premium.
C) excess return.
D) average return.
E) variancE.

Question 8

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2011? Rank from highest to lowest.

A) large company stocks, U.S. Treasury bills, long-term government bonds
B) small company stocks, long-term corporate bonds, large company stocks
C) long-term government bonds, long-term corporate bonds, small company stocks
D) small company stocks, large company stocks, long-term corporate bonds
E) long-term corporate bonds, large company stocks, U.S. Treasury bills

Question 9

A portfolio of large company stocks would contain which one of the following types of securities?

A) stocks of the firms which represent the smallest 20% of the companies listed on the NYSE
B) U.S. Treasury bills
C) long-term corporate bonds
D) stocks of firms included in the S&P 500 index
E) long-term government bonds

Question 10

The return earned in an average year over a multi-year period is called the _____ average return.

A) arithmetic
B) standard
C) variant
D) geometric
E) real

Question 11

On average,for the period 1926 through 2011:

A) the real rate of return on U.S. Treasury bills has been negative.
B) small company stocks have underperformed large company stocks.
C) long-term government bonds have produced higher returns than long-term corporate bonds.
D) the risk premium on long-term corporate bonds has exceeded the risk premium on long-term government bonds.
E) the risk premium on large company stocks has exceeded the risk premium on small company stocks.

Question 12

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2011?

A) U.S. Treasury bills
B) long-term government bonds
C) small company stocks
D) large company stocks
E) long-term corporate bonds

Question 13

The average risk premium on U.S. Treasury bills over the period of 1926 to 2011 was _____%.

A) 0.0
B) 1.6
C) 2.2
D) 3.1
E) 3.8

Question 14

Based on the period of 1926 through 2011,_____ have tended to outperform other securities over the long-term.

A) U.S. Treasury bills
B) large company stocks
C) long-term corporate bonds
D) small company stocks
E) long-term government bonds

Question 15

Over the period of 1926 to 2011,small company stocks had an average return of ____%.

A) 8.8
B) 10.2
C) 12.4
D) 14.6
E) 16.5

Question 16

Over the period of 1926 to 2011,the average rate of inflation was _____%.

A) 2.0
B) 2.7
C) 3.1
D) 3.8
E) 4.3

Question 17

A symmetric,bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution.

A) gamma
B) Poisson
C) bi-modal
D) normal
E) uniform

Question 18

The standard deviation for a set of stock returns can be calculated as the:

A) positive square root of the average return.
B) average squared difference between the actual return and the average return.
C) positive square root of the variance.
D) average return divided by N minus one, where N is the number of returns.
E) variance squared.

Question 19

The average squared difference between the actual return and the average return is called the:

A) volatility return.
B) variance.
C) standard deviation.
D) risk premium.
E) excess return.

Question 20

The average annual return on long-term corporate bonds for the period of 1926 to 2011 was ________%.

A) 3.8
B) 5.8
C) 6.4
D) 7.9
E) 8.4

Question 21

Which of the following statements concerning the standard deviation are correct?
I. The greater the standard deviation,the lower the risk.
II. The standard deviation is a measure of volatility.
III. The higher the standard deviation,the less certain the rate of return in any one given year.
IV. The higher the standard deviation,the higher the expected return.

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

Question 22

The standard deviation on small company stocks: I. is greater than the standard deviation on large company stocks.
II) is less than the standard deviation on large company stocks.
III) had an average value of about 33% for the period 1926 to 2011.
IV) had an average value of about 20% for the period 1926 to 2011.

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

Question 23

Which of the following statements are correct concerning the variance of the annual returns on an investment?
I. The larger the variance,the more the actual returns tend to differ from the average return.
II. The larger the variance,the larger the standard deviation.
III. The larger the variance,the greater the risk of the investment.
IV. The larger the variance,the higher the expected return.

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

Question 24

The dollar value of the world stock market capitalization,from largest to smallest is:

A) Europe, United States, United Kingdom, Japan.
B) United States, Japan, Europe, United Kingdom.
C) United States, Europe, Japan, United Kingdom.
D) Japan, United States, Europe, United Kingdom.
E) Japan, United States, United Kingdom, EuropE.

Question 25

How much of total world stock market capitalization is from the United States in 2011?

A) Approximately 10%
B) Approximately 25%
C) Approximately 45%
D) Approximately 57%
E) Approximately 72%

Question 26

One year ago,you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today,the stock is worth $34.60 per share. What is the total amount of your dividend income to date from this investment?

A) $0.40
B) $1.60
C) $2.10
D) $2.50
E) $3.70

Question 27

You purchased 200 shares of stock at a price of $36.72 per share. Over the last year,you have received total dividend income of $322. What is the dividend yield?

A) 3.2%
B) 4.4%
C) 6.8%
D) 9.2%
E) 11.4%

Question 28

In predicting the expected future return of the market,one of the dangers is that:

A) the past is not indicative of the future.
B) the past period measured is too short to get a reasonable estimate of the future.
C) the equity premium does not include the premium on debt.
D) the past is not indicative of the future and the past period measured is too short to get a reasonable estimate of the future.
E) the past is not indicative of the future and the equity premium does not include the premium on debt.

Question 29

One year ago,you purchased a stock at a price of $32 a share. Today,you sold the stock and realized a total return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock?

A) 1.25%
B) 3.75%
C) 6.25%
D) 18.75%
E) 21.25%

Question 30

Which country has the lowest stock market risk premium?

A) Denmark
B) Belgium
C) Switzerland
D) Spain
E) Norway

Question 31

The variance of returns is computed by dividing the sum of the:

A) squared deviations by the number of returns minus one.
B) average returns by the number of returns minus one.
C) average returns by the number of returns plus one.
D) squared deviations by the average rate of return.
E) squared deviations by the number of returns plus onE.

Question 32

In estimating the future equity risk premium,it is important to include assumptions about:

A) the historical distribution of returns on derivative securities.
B) the future risk environment.
C) the amount of risk aversion of future investors.
D) the historical distribution of returns on derivative securities and the future risk environment.
E) the future risk environment and the amount of risk aversion of future investors.

Question 33

A capital gain occurs when:

A) the selling price is less than the purchase price.
B) the purchase price is less than the selling price.
C) there is no dividend paid.
D) there is no income component of return.
E) never, as they cannot exist.

Question 34

A year ago,you purchased 300 shares of IXC Technologies,Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today,you sold all of your shares for $28.14 per share. What is your total dollar return on this investment?

A) $5,703
B) $5,733
C) $5,753
D) $5,763
E) $5,853

Question 35

Six months ago,you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today,you sold all of your shares for $45.13 per share. What is the total amount of your capital gains on this investment?

A) $1.24
B) $1.64
C) $40.00
D) $124.00
E) $164.00

Question 36

Winslow,Inc. stock is currently selling for $40 a share. The stock has a dividend yield of 3.8%. How much dividend income will you receive per year if you purchase 500 shares of this stock?

A) $152
B) $190
C) $329
D) $760
E) $1,053

Question 37

Capital market history shows us that the average return relationship from lowest to highest between securities is:

A) inflation, corporate bonds, Treasuries, small company stocks, large company stocks.
B) Treasury bills, inflation, small company stocks, large company stocks.
C) Treasury bills, corporate bonds, government bonds, large common stocks, small company stocks.
D) Treasury bills, government bonds, corporate bonds, large common stocks, small company stocks.
E) There is no ordering.

Question 38

The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant,then:

A) the capital gains yield will decrease.
B) the capital gains yield will increase.
C) the dividend yield will increase.
D) the dividend yield will also remain constant.
E) neither the capital gains yield nor the dividend yield will changE.

Question 39

The risk premium is computed by ______ the average return for the investment.

A) subtracting the inflation rate from
B) adding the inflation rate to
C) subtracting the average return on the U.S. Treasury bill from
D) adding the average return on the U.S. Treasury bill to
E) subtracting the average return on long-term government bonds from

Question 40

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

A) overestimate; overestimate
B) overestimate; underestimate
C) underestimate; overestimate
D) underestimate; underestimate
E) accurately; accurately

Question 41

A stock had the following prices and dividends. What is the geometric average return on this stock?

A) 3.2%
B) 3.4%
C) 3.6%
D) 3.8%
E) 4.0%

Question 42

A stock had returns of 8%,14%,and 2% for the past three years. Based on these returns,what is the probability that this stock will earn at least 20% in any one given year?

A) 0.5%
B) 1.0%
C) 2.5%
D) 5.0%
E) 16.0%

Question 43

A stock has an expected rate of return of 8.3% and a standard deviation of 6.4%. Which one of the following best describes the probability that this stock will lose 11% or more in any one given year?

A) less than 0.5%
B) less than 1.0%
C) less than 1.5%
D) less than 2.5%
E) less than 5%

Question 44

What are the arithmetic and geometric average returns for a stock with annual returns of 21%,8%,-32%,41%,and 5%?

A) 5.6%; 8.6%
B) 5.6%; 6.3%
C) 8.6%; 5.6%
D) 8.6%; 8.6%
E) 8.6%; 6.3%

Question 45

A stock had returns of 8%,39%,11%,and -24% for the past four years. Which one of the following best describes the probability that this stock will NOT lose more than 43% in any one given year?

A) 84.0%
B) 95.0%
C) 97.5%
D) 99.0%
E) 99.5%

Question 46

What are the arithmetic and geometric average returns for a stock with annual returns of 4%,9%,-6%,and 18%?

A) 5.89%; 6.25%
B) 6.25%; 5.89%
C) 6.25%; 8.33%
D) 8.3%; 5.89%
E) 8.3%; 6.25%

Question 47

Excelsior share are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your total rate of return?

A) 4.17%
B) 6.25%
C) 10.42%
D) 104.67%
E) 110.42%

Question 48

A stock had returns of 6%,13%,-11%,and 17% over the past four years. What is the geometric average return for this time period?

A) 4.5%
B) 5.7%
C) 6.2%
D) 7.3%
E) 8.2%

Question 49

You purchased 300 shares of Deltona,Inc. stock for $44.90 a share. You have received a total of $630 in dividends and $14,040 in proceeds from selling the shares. What is your capital gains yield on this stock?

A) 4.06%
B) 4.23%
C) 4.68%
D) 8.55%
E) 8.91%

Question 50

A stock had returns of 8%,-2%,4%,and 16% over the past four years. What is the standard deviation of this stock for the past four years?

A) 6.3%
B) 6.6%
C) 7.1%
D) 7.5%
E) 7.9%

Question 51

A stock has returns of 3%,18%,-24%,and 16% for the past four years. Based on this information,what is the 95% probability range for any one given year?

A) -8.4 to 11.7%
B) -16.1 to 22.6%
C) -24.5 to 34.3%
D) -35.4 to 41.9%
E) -54.8 to 61.3%

Question 52

You bought 100 shares of stock at $20 each. At the end of the year,you received a total of $400 in dividends,and your stock was worth $2,500 total. What was your total dollar capital gain and total dollar return?

A) $400; $500
B) $400; $900
C) $500; $900
D) $900; $2,500
E) None of these.

Question 53

You bought 100 shares of stock at $20 each. At the end of the year,you received a total of $400 in dividends,and your stock was worth $2,500 total. What was your total return?

A) 20%
B) 45%
C) 50%
D) 90%
E) None of these.

Question 54

A stock had returns of 11%,1%,9%,15%,and -6% for the past five years. Based on these returns,what is the approximate probability that this stock will earn at least 23% in any one given year?

A) 0.5%
B) 1.0%
C) 2.5%
D) 5.0%
E) 16.0%

Question 55

Excelsior shares are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your percentage capital gain this year?

A) 4.17%
B) 6.25%
C) 10.42%
D) 104.17%
E) 110.42%

Question 56

Eight months ago,you purchased 400 shares of Winston,Inc. stock at a price of $54.90 a share. The company pays quarterly dividends of $.50 a share. Today,you sold all of your shares for $49.30 a share. What is your total percentage return on this investment?

A) -10.2%
B) -9.3%
C) -8.4%
D) 12.0%
E) 13.4%

Question 57

Over the past five years,a stock produced returns of 14%,22%,-16%,2%,and 10%. What is the probability that an investor in this stock will NOT lose more than 8% nor earn more than 21% in any one given year?

A) 34%
B) 68%
C) 95%
D) 99%
E) 100%

Question 58

Today,you sold 200 shares of SLG,Inc. stock. Your total return on these shares is 12.5%. You purchased the shares one year ago at a price of $28.50 a share. You have received a total of $280 in dividends over the course of the year. What is your capital gains yield on this investment?

A) 4.80%
B) 5.00%
C) 6.67%
D) 7.59%
E) 11.67%

Question 59

Six months ago,you purchased 1,200 shares of ABC stock for $21.20 a share. You have received dividend payments equal to $.60 a share. Today,you sold all of your shares for $22.20 a share. What is your total dollar return on this investment?

A) $720
B) $1,200
C) $1,440
D) $1,920
E) $3,840

Question 60

You just sold 200 shares of Langley,Inc. stock at a price of $38.75 a share. Last year you paid $41.50 a share to buy this stock. Over the course of the year,you received dividends totaling $1.64 per share. What is your capital gain on this investment?

A) -$550
B) -$222
C) -$3
D) $550
E) $878

Question 61

The returns on your portfolio over the last 5 years were -5%,20%,0%,10% and 5%. What is the arithmetic average return?

A) 5.0%
B) 6.0%
C) 7.5%
D) 8.0%
E) 10.0%

Question 62

The market portfolio of common stocks earned 14.7% in one year. Treasury bills earned 5.7%. What was the real risk premium on equities?

A) 5.0%
B) 6.5%
C) 9.0%
D) 12.2%
E) 18.7%

Question 63

The prices for IMB over the last 3 years are given below. Assuming no dividends were paid,what was the 3-year holding period return? Given the following information: Year 1 return = 10%,Year 2 return = 15%,Year 3 return = 12%.

A) 12.3%
B) 13.9%
C) 15.8%
D) 41.7%
E) 46.5%

Question 64

What securities have offered the highest average annual returns over the last several decades?
Can we conclude that return and risk are related in real life?

Question 65

Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%. If the returns are normally distributed,the approximate probability of receiving a return greater than 32% is approximately:

A) 2%.
B) 5%.
C) 16%.
D) 33%.
E) 67%.

Question 66

One year ago,you purchased a stock at a price of $60 a share. Today,you sold the stock and realized a total return of 30%. Your capital gain was $8 a share. What was your dividend yield on this stock?

A) 4.5%
B) 5.0%
C) 5.5%
D) 6.0%
E) 6.5%

Question 67

The total annual returns on large company common stocks averaged 12.3% from 1926 to 2011,small company stocks averaged 17.4%,long-term government bonds averaged 5.8%,while Treasury Bills averaged 3.8%. What was the average risk premium earned by long-term government bonds,and small company stocks respectively?

A) 1.8%; 13.3%
B) 2.0%; 13.6%
C) 4.4%; 11.9%
D) 9.5%; 1.8%
E) None of these.

Question 68

Winslow,Inc. stock is currently selling for $60 a share. The stock has a dividend yield of 2.5%. How much dividend income will you receive per year if you purchase 800 shares of this stock?

A) $20
B) $60
C) $1,200
D) $1,380
E) $1,560

Question 69

If the expected return on the market is 16%,then using the historical risk premium on large stocks of 8.6%,the current risk-free rate is:

A) 4.6%
B) 7.4%
C) 8.4%
D) 10.6%
E) 12.6%

Question 70

A stock had returns of 7%,9%,-3%,and 5% over the past four years. What is the standard deviation of this stock for the past four years?

A) 4.5%
B) 6.4%
C) 6.7%
D) 7.2%
E) 7.5%

Question 71

Kids Toy Co. has had total returns over the past five years of 0%,7%,-2%,10%,and 12%. What was the arithmetic average return on this stock?

A) 5.40%
B) 5.50%
C) 6.15%
D) 6.33%
E) 6.75%

Question 72

One year ago,you purchased a stock at a price of $33. The stock pays quarterly dividends of $.60 per share. Today,the stock is worth $35.2 per share. What is the total amount of your dividend income to date from this investment?

A) $0.60
B) $1.80
C) $2.40
D) $3.00
E) $3.20

Question 73

You purchased 300 shares of stock at a price of $37.23 per share. Over the last year,you have received total dividend income of $351. What is the dividend yield?

A) 3.14%
B) 3.26%
C) 3.39%
D) 4.50%
E) 10.20%

Question 74

A year ago,you purchased 300 shares of IXC Technologies,Inc. stock at a price of $10.05 per share. The stock pays an annual dividend of $.10 per share. Today,you sold all of your shares for $29.32 per share. What is your total dollar return on this investment?

A) $8,781
B) $8,796
C) $8,811
D) $8,832
E) $8,921

Question 75

You have a sample of returns observations for the Malta Stock Fund. The 4 returns are 7.25%,5.6%,12.5%,1.0%. What is the average return and variance of these returns?

A) 6.50%; 16.9
B) 6.60%; 22.5
C) 6.60%; 4.75
D) 26.35%; 67.6
E) None of these.

Question 76

The return pattern on your favorite stock has been 5%,8%,-12%,15%,21% over the last five years. What has been your average return and holding period return over the last 5 years?

A) 4.5%; 6.5%
B) 7.4%; 38.9%
C) 7.4%; 7.76%
D) 7.4%; 76.73%
E) None of these.

Question 77

What are the arithmetic and geometric average returns for a stock with annual returns of 5%,8%,-3%,and 16%?

A) 6.5%; 6.28%
B) 6.5%; 9.21%
C) 9.3%; 6.28%
D) 9.3%; 9.21%
E) 10.25%; 8.31%

Question 78

The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%. What was the average risk premium you earned?

A) 2.9%
B) 3.1%
C) 9.3%
D) 9.4%
E) None of these.

Question 79

Six months ago,you purchased 100 shares of stock in ABC Co. at a price of $43.26 a share. ABC stock pays a quarterly dividend of $.10 a share. Today,you sold all of your shares for $46.71 per share. What is the total amount of your capital gains on this investment?

A) $0.4
B) $40
C) $45
D) $345
E) $385

Question 80

The returns on your portfolio over the last 5 years were -5%,20%,0%,10% and 5%. What is the standard deviation of your return?

A) 2.74%
B) 5.21%
C) 9.62%
D) 10.12%
E) 12.70%