Deck 10: Risk and Return: Lessons From Market History

Question 1

Assume stocks A and B have had identical stock prices every day for the past 3 years.Stock A pays a dividend but Stock B does not.Which one of these statements applies to these stocks for the last 3 years?

A)Their annual total rates of return are equal.
B)Stock A's total return has been higher than Stock B's every year.
C)Stock B's capital gain has exceeded Stock A's every year.
D)Stock A's total return had to be positive every year.
E)Stock B's holding period return exceeded that of Stock A.

Answer 1

Stock A's total return has been higher than Stock B's every year.

Question 2

Winter's just declared an increase in its annual dividend from $.82 a share to $.85 a share.If the stock price should remain constant,then

A)the capital gains yield would decrease.
B)the capital gains yield would increase.
C)the dividend yield would remain constant.
D)the dividend yield would increase.
E)neither the capital gains yield nor the dividend yield would change.

Answer 2

the dividend yield would increase.

Question 3

Over the long-term,which one of the following is a correct statement concerning risk premium?

A)The lower the volatility of returns,the greater the risk premium.
B)Stocks tend to have a higher risk premium than bonds.
C)The lower the rate of return,the greater the risk premium.
D)The risk premium does not affect the rate of return.
E)The risk premium varies by the same percentage rate as the inflation rate.

Answer 3

Stocks tend to have a higher risk premium than bonds.

Question 4

The risk premium is computed by ________ the average rate of return for an investment.

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

Question 5

Which one of these statements is correct?

A)Treasury bills outperformed inflation every year during the period 1926-2015.
B)Small-company stocks outperformed large-company stocks every year during the period 1926-2015.
C)On an annual basis,small-company stocks had more consistent rates of return than did large-company stocks for the period 1926-2015.
D)The inflation rate has been positive every year during the period 1926-2015.
E)During the 1930s (Great Depression),long-term government bonds produced a relatively stable rate of return relative to large-company stocks.

Question 6

The histograms of the returns on large-company and small-company stocks for the period 1926 to 2015 show that

A)large-company stocks never lost more than 20 percent in any one year.
B)1945 was the best-performing year for both large-company and small-company stocks.
C)small-company stocks most commonly return 30 to 40 percent.
D)small-company stocks are more volatile than large-company stocks.
E)large-company stocks are riskier than small-company stocks.

Question 7

For our historical comparison purposes,how are large-company stocks defined?

A)Stocks of the lowest 20 percent of the firms listed on the NYSE based on market capitalization
B)Stocks with average annual returns that exceed the average annual return of the U.S.Treasury bill
C)Any firm that has been listed on the NYSE for 40 years or more
D)Stocks of firms included in the S&P 500 composite index
E)Stocks of firms that employ over 5,000 employees

Question 8

During the period 2000 to 2015,which one of the following years had the lowest rate of return for the S&P 500 Index?

A)2002
B)2008
C)2001
D)2009
E)2010

Question 9

On average,for the period 1926 to 2015

A)U.S.Treasury bills had a negative risk premium.
B)small-company stocks underperformed large-company stocks.
C)large-company stocks had a higher risk premium than long-term corporate bonds.
D)intermediate-term government bonds produced higher returns than long-term government bonds.
E)large-company stocks had a higher risk premium than small-company stocks.

Question 10

What conclusion should you draw from the performance of stocks and bonds over the period 1926 to 2015?

A)Bonds have greater volatility than stocks.
B)Stock returns have a lower standard deviation than bond returns.
C)In any year,stocks will outperform bonds.
D)Stock returns have a smaller risk premium than bond returns.
E)Stocks are riskier than bonds.

Question 11

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

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

Question 12

Assume today is December 31,2015.Approximately how long has it been since the annual rate of inflation as measured by the Consumer Price Index has been negative?

A)Less than 40 years
B)Between 40 and 50 years
C)Between 50 and 60 years
D)Between 60 and 70 years
E)More than 70 years

Question 13

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 14

For the period 1926 to 2015,the mean return on large-company stocks is

A)8.7 percent.
B)11.9 percent.
C)13.2 percent.
D)9.6 percent.
E)14.1 percent.

Question 15

Which one of the following values cannot be negative?

A)Capital gain
B)Total dollar return
C)Holding period return
D)Dividend yield
E)Total return

Question 16

The histogram of the returns on large-company stocks for the period 1926 to 2015 shows that the largest number of years had annual returns of

A)0 to 10 percent.
B)10 to 20 percent.
C)20 to 30 percent.
D)30 to 40 percent.
E)-10 to 0 percent.

Question 17

Based on the period 1926 to 2015,which category of securities has outperformed all of the other categories?

A)Long-term corporate bonds
B)U.S.Treasury bills
C)Small-company stocks
D)Large-company stocks
E)Long-term government bonds

Question 18

Which one of these statements correctly reflects historical history for the period 1926-2015?

A)U.S.Treasury bills had a negative rate of return during the Great Depression.
B)The rate of return in any given year is a good estimate of the rate of return for the following year.
C)For large-company stocks,both the worst and best annual rate of return occurred during the period 1930-35.
D)The annual rate of return on U.S.Treasury bills never exceeded 8 percent.
E)The maximum annual rate of return on large-company stocks was 33 percent.

Question 19

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 to 2015?

A)Long-term corporate bonds
B)Long-term government bonds
C)Small-company stocks
D)Large-company stocks
E)U.S.Treasury bills

Question 20

Which one of these statements correctly reflects historical history for the period 1926-2015?

A)Large-company stocks have never returned more than 40 percent in a single year.
B)There is a direct relationship between the annual returns on large-company stocks and long-term government bonds.
C)U.S.Treasury bills have had a positive rate of return every single year.
D)The return on U.S.Treasury bills has exceeded the rate of inflation every single year.
E)The rate of inflation as measured by the consumer price index has been positive every single year.

Question 21

How did long-term U.S.Treasury bonds perform in 2008?

A)Decreased by more than 15 percent
B)Decreased between 5 and 15 percent
C)Changed between -5 and +5 percent
D)Increased between 5 and 15 percent
E)Increased more than 15 percent

Question 22

If you examine the U.S.stock market risk premium by extending the 1926 to 2015 time period backwards in time to 1802 (given the available information),the risk premium

A)decreases to 5.2 percent.
B)increases to 7.6 percent.
C)decreases to 3.9 percent.
D)increases to 7.1 percent.
E)decreases to 6.3 percent.

Question 23

You are comparing the returns of two portfolios for a 10-year period.Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II.Given this,what do you know with certainty?

A)Portfolio I has a lower standard deviation than Portfolio II.
B)Portfolio I is riskier than Portfolio II.
C)Portfolio II has less total risk than Portfolio I.
D)Portfolio I will outperform Portfolio II over the next 10 years.
E)Portfolio II consists of more individual stocks than Portfolio I.

Question 24

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

A)gamma
B)Poisson
C)bimodal
D)normal
E)uniform

Question 25

Based on historical performance from 1900-2010,the U.S.equity risk premium was approximately

A)6.1 percent.
B)5.4 percent.
C)7.2 percent.
D)9.0 percent.
E)8.3 percent.

Question 26

How is the Sharpe ratio defined as it applies to security returns?

A)Average return / Risk premium
B)Standard deviation / Risk premium
C)Average return / Standard deviation
D)Risk premium / Average return
E)Risk premium / Standard deviation

Question 27

The variance of returns for a portfolio of stocks 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 28

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

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

Question 29

What percentage of the time should you expect to earn an annual rate of return that is within two standard deviations of the mean?

A)100%
B)95%
C)68%
D)99%
E)75%

Question 30

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

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

Question 31

Past performance

A)does not guarantee future performance.
B)is totally unrelated to future performance.
C)guarantees future performance.
D)is a perfect representation of future performance for the same length of time.
E)will be duplicated in the near future.

Question 32

Given a normal distribution,assume you want to earn a rate of return that plots more than three standard deviations above the mean.What is your probability of earning such a return in any one year?

A).14 percent or less
B).15 to .25 percent
C).26 to .50 percent
D).51 to 1 percent
E)More than 1 percent

Question 33

During the 2008 financial crisis,the Icelandic stock exchange temporarily halted trading.What was the reaction of that market when trading resumed a few days later?

A)Increase in excess of 50 percent
B)Increase between 25 and 50 percent
C)Change between -25 and +25 percent
D)Decrease between 25 and 50 percent
E)Decrease in excess of 75 percent

Question 34

For the period 1926 to 2015,large-company stocks had a standard deviation of

A)20 percent.
B)6 percent.
C)13 percent.
D)27 percent.
E)10 percent.

Question 35

A review of annualized equity risk premiums by country for the period 1900 to 2010 shows that

A)country with the lowest standard deviation had the lowest equity risk premium.
B)the standard deviation of returns was consistent among countries.
C)the sharpe ratio for each country is equal.
D)the United States had the highest risk premium of the countries listed.
E)Sharpe ratios vary significantly among countries.

Question 36

Which one of these countries had the highest average stock market risk premium for the period 1900 to 2010?

A)United States
B)United Kingdom
C)Italy
D)Sweden
E)Denmark

Question 37

Given a set of returns,the wider the distribution of those returns,the

A)higher the number of those returns.
B)lower the average rate of return.
C)lower the variance.
D)higher the standard deviation.
E)lower the volatility.

Question 38

As of 2015,the United States represents about ________ percent of the total world stock market capitalization.

A)53
B)67
C)27
D)38
E)19

Question 39

The higher the Sharpe ratio,the

A)greater the total risk.
B)greater the return per unit of risk.
C)more the security resembles the overall market.
D)greater the risk per unit of return.
E)lower the level of total risk.

Question 40

Which set of characteristics should you prefer in a stock if you desire the highest (least negative)rate of return assuming that you will earn a negative total return for the period?

A)High-dividend,high standard deviation
B)No dividend,high standard deviation
C)High-dividend,low standard deviation
D)Low-dividend,high standard deviation
E)Low-dividend,low standard deviation

Question 41

Winslow stock is currently selling for $39 a share.The stock has a dividend yield of 2.3 percent.How much dividend income will you receive per year if you purchase 400 shares of this stock?

A)$248.80
B)$390.47
C)358.80
D)$239.50
E)$360.00

Question 42

EXO shares are currently selling for $22.08 each.You bought 300 shares one year ago at $18.60 a share and received dividend payments of $0.62 a share.What is the percentage capital gain for the period?

A)14.17%
B)18.71%
C)20.24%
D)23.21%
E)22.04%

Question 43

One year ago,Stacey purchased 200 shares of IXC stock at a price of $42.68 per share.The stock pays an annual dividend of $1.06 per share.Today,she sold all of her shares for $37.43 per share.What is her total dollar return on this investment?

A)−$703
B)−$838
C)$1,022
D)$1,262
E)−$1,050

Question 44

What lesson can be learned from the 2008 market decline?

A)Stocks and bonds react similarly in downward markets.
B)Diversification lowers risk.
C)Market declines cause high inflation rates.
D)Global markets all react exactly the same.
E)Equity risk premiums will decline in the future.

Question 45

In 2008,the S&P 500 index

A)declined in value every month.
B)declined almost 17 percent in 1 month.
C)increased in value during 2 months.
D)never increased by more than 2 percent in any 1 month.
E)increased in value during the first 3 months.

Question 46

One year ago,Ted purchased 300 shares of stock at $18.09 a share.Today,he received a total of $267 in dividends and sold his shares for a total of $5,250.What was his total rate of return?

A)−3.57%
B)−2.94%
C)−4.43%
D)2.47%
E)1.66%

Question 47

Deltona stock sold for $52.84 a share 1 year ago and pays an annual dividend of $3.20.What does the stock price need to be today for the annual capital gain to be 6.8 percent?

A)$53.23
B)$49.25
C)$56.43
D)$48.63
E)$54.18

Question 48

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

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

Question 49

The return earned in a typical year over a multiyear period is called the ________ average return.

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

Question 50

Suppose a portfolio had an arithmetic average return of 8 percent for a 4-year period.Which one of these statements must be true regarding this portfolio for the period?

A)At least one of the 4 years produced an annual rate of return of 8 percent.
B)If the standard deviation of the portfolio is greater than zero,then the geometric average portfolio return is less than 8 percent.
C)The standard deviation of the portfolio must be lower than the standard deviation of a comparable portfolio that had an arithmetic average return of 9 percent.
D)If the standard deviation of the portfolio is zero,then the geometric average return must also be zero.
E)The holding period return must be less than 8 percent.

Question 51

One year ago,Barkley's stock sold for $28 a share.During last year,Barkley's paid $1.23 per share in dividends and saw its stock price increase by 7 percent for the year.Today,the firm announced that it will pay $1.30 per share in dividends this year.What do you know with certainty about the performance of Barkley's stock for this year?

A)The total rate of return will be higher this year than it was last year.
B)The dividend yield for this year will be higher than it was last year.
C)The capital gains yield will be positive.
D)The dividend yield for this year will be lower than it was last year.
E)The total rate of return will be lower this year than it was last year.

Question 52

This morning,you purchased one share of stock for $26.The stock pays $.32 per share each quarter as a dividend.What must the stock price be 1 year from now if you want to earn a total return of 16 percent for the year?

A)$29.84
B)$28.88
C)$25.01
D)$27.12
E)$27.46

Question 53

In 2008,the S&P 500 index had an annual decline of

A)68 percent.
B)24 percent.
C)46 percent.
D)57 percent.
E)37 percent.

Question 54

One year ago,Aimee purchased 300 shares of stock at a price of $21.39 per share.Over the last year,she received total dividend income of $69.What is the dividend yield?

A)2.20%
B)1.08%
C)2.47%
D)0.65%
E)2.14%

Question 55

One year ago,you purchased a stock at a price of $47.26 a share.Today,you sold the stock and realized a total return of 9.8 percent.Your capital gain was $3.68 a share.What was your dividend yield on this stock?

A)1.25%
B)1.85%
C)2.01%
D)1.75%
E)1.35%

Question 56

The geometric average is probably best applied to ________ performance.

A)past
B)future
C)both past and future
D)neither past nor future
E)estimated

Question 57

The annual returns for KLO stock for the last three years are 7.4 percent,3.2 percent,and 17.8 percent.Assuming no dividends were paid,what was the 3-year holding period percentage return?

A)28.40%
B)25.70%
C)31.40%
D)30.57%
E)36.52%

Question 58

You just sold 600 shares of stock for $42.09 a share.One year ago,you purchased the stock for $44.50 a share and have received dividends totalling $0.68 per share.What is your total capital gain in dollars?

A)−$1,446
B)−$1,038
C)$1,038
D)$1,446
E)$1,854

Question 59

Kurt's Toy Co.has total annual returns for the past 5 years of -8.2 percent,11.7 percent,-6.4 percent,18.7 percent,and 6.8 percent.What is the 5-year holding period return?

A)9.00%
B)17.50%
C)22.60%
D)21.67%
E)20.33%

Question 60

Eight months ago,Isaac purchased 500 shares of stock at a price of $36.20 a share.To date,he has received two quarterly dividends of $.46 a share each.If he sells his shares at the current price of $36.44 a share,what will be his holding period percentage return?

A).55%
B)1.01%
C)3.20%
D)2.78%
E)2.40%

Question 61

A stock had annual returns of 9 percent,−16 percent,14 percent,and 2 percent over the past 4 years.What is the standard deviation of these returns?

A)11.33%
B)16.09%
C)9.10%
D)13.12%
E)7.99%

Question 62

Suppose you own a risky asset with an expected return of 18.2 percent and a standard deviation of 27.2 percent.If the returns are normally distributed,the approximate probability of losing 9 percent or more in a single year is ________ percent.

A).26
B)4.56
C)15.87
D)31.74
E)2.28

Question 63

For the period 1926 to 2015,small-company stocks had an average return of 16.5 percent,U.S.Treasury bills returned 3.5 percent,and inflation averaged 3.0 percent.What was the risk premium on small-company stocks during this period?

A)12.5 percent
B)20.0 percent
C)13.0 percent
D)13.5 percent
E)10.0 percent

Question 64

A stock had returns of 8 percent,13 percent,and −3 percent for the past 3 years.Based on these returns,what is the approximate probability that this stock will earn at least 14.19 percent in any one given year?

A)8.00%
B)2.28%
C)15.87%
D)4.56%
E)31.74%

Question 65

Assume a $1 investment in a stock 23 years ago is now worth $28.82.What is the geometric average return for the period?

A)13.52%
B)15.74%
C)22.08%
D)25.30%
E)19.03%

Question 66

A stock has an expected rate of return of 13.9 percent and a standard deviation of 23.3 percent.Which one of the following best describes the probability that this stock will lose more than 1/3 of its value in any one year?

A)Less than 0.1%
B)Approximately 2.25%
C)Approximately 1.13%
D)Less than 0.26%
E)Approximately 4.66%

Question 67

What are the arithmetic and geometric average returns for a stock with annual returns of 6.2 percent,12.8 percent,−7.7 percent,and 9.4 percent?

A)5.175%; 5.028%
B)6.256%; 4.892%
C)5.175%; 4.873%
D)6.256%; 5.028%
E)6.900%; 4.873%

Question 68

A stock returned 11 percent,16 percent,−7 percent,and −13 percent annually for the past 4 years.Based on this information,what is the 99.74 percent probability range for any one given year?

A)−34.54 to 38.04%
B)−36.1 to 40.1%
C)−32.5 to 35.5%
D)−40.06 to 43.56%
E)−44.82 to 47.32%

Question 69

Assume that during a 7-year period,inflation averaged 2.8 percent,U.S.Treasury bill yields averaged 3.3 percent,and long-term government bond yields averaged 5.9 percent.What was the average rate of return on long-term corporate bonds if they commanded a risk premium of 0.2 percent more than the long-term government bonds?

A)9.2%
B)8.9%
C)5.7%
D)6.1%
E)9.4%

Question 70

What are the arithmetic and geometric average returns for a stock with annual returns of 14.9 percent,14.6 percent,−2.8 percent,and 9.7 percent?

A)9.100%; 8.673%
B)8.882%; 8.854%
C)9.100%; 8.771%
D)8.897%; 8.854%
E)9.100%; 8.854%

Question 71

Over the past 3 years,a stock had annual returns of 6.4 percent,11.9 percent,and 14.8 percent.What is the mean return?

A)11.03%
B)7.47%
C)8.28%
D)16.55%
E)12.60%

Question 72

A stock had returns of 22 percent,1 percent,−27 percent,19 percent,and 7 percent annually for the past 5 years.Based on these returns,what is the approximate probability that this stock will earn at least 60 percent in any one given year?

A)almost 0%
B)slightly more than 2.28%
C)slightly more than 0.13%
D)slightly less than 2.28%
E)slightly less than 0.13%

Question 73

A stock had returns of 13 percent,8 percent,1 percent,and −9 percent annually for the past 4 years.What is the mean and standard deviation of these returns?

A)4.33%; 9.54%
B)4.33%; 11.08%
C)3.25%; 9.54%
D)3.25%; 13.22%
E)3.25%; 11.08%

Question 74

The arithmetic average return on your portfolio for the past 5 years is 9.3 percent.You earned −7.4 percent,17.1 percent,6.3 percent,and 11.8 percent for 4 of those 5 years.What rate of return did you earn in the fifth year?

A)18.7%
B)16.0%
C)13.2%
D)19.6%
E)17.5%

Question 75

Jen invested $1 fifty years ago.Today,her investment is worth $18,329.46.What is the geometric average return on this investment?

A)30.27%
B)21.69%
C)32.46%
D)36.67%
E)25.09%

Question 76

GLM stock provided annual returns of 9.9 percent,8.2 percent,−6.7 percent,4.5 percent,and 7.1 percent over the last 5 years.What is the geometric average rate of return?

A)6.03%
B)4.42%
C)6.69%
D)5.48%
E)5.56%

Question 77

A stock had returns of 7 percent,7 percent,7 percent,and 7 percent annually over the past 4 years.What is the geometric average return for this time period?

A)6.875%
B)7%
C)6.929%
D)9.998%
E)9.441%

Question 78

Assume inflation averaged 1.2 percent during a period in which U.S.Treasury bills earned 1.3 percent.What was the rate of return on large-company stocks if the risk premium on those stocks was 6.8 percent for the period?

A)8.1%
B)8.0%
C)7.9%
D)9.3%
E)9.2%

Question 79

A stock had returns of 11 percent,26 percent,8 percent,and −38 percent annually for the past 4 years.What is the mean and variance of these returns?

A)1.75%; .057319
B)1.75%; .076425
C)3.50%; .057319
D)3.50%; .062833
E)3.50%; .076425

Question 80

Assume a 20-year period produced small-company returns of 16.7 percent with a risk premium of 9.8 percent,inflation of 5.4 percent,and long-term government bond returns of 10.1 percent.What was the risk-free rate of return during this period?

A)4.7%
B)6.6%
C)11.3%
D)6.9%
E)4.4%