Deck 10: Risk and Return Lessons From Market History

Question 1

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.

Answer 1

risk premium.

Question 2

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2009? Rank from highest to lowest.

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

Answer 2

Small company stocks, large company stocks, long-term government bonds

Question 3

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

Answer 3

arithmetic

Question 4

Over the period of 1926 to 2009,small company stocks had an average return of ____%.

A)8.9
B)12.2
C)16.6
D)19.6
E)21.3

Question 5

The average annual return on long-term corporate bonds for the period of 1926 to 2009 was _______%.

A)3.8
B)5.8
C)6.2
D)7.5
E)8.4

Question 6

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 7

The average annual return on small company stocks was about _______% points greater than the average annual return on large-company stocks over the period of 1926 to 2009.

A)2
B)4
C)5
D)6
E)9

Question 8

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

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

Question 9

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

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

Question 10

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

A)Stock 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 11

On average,for the period 1926 through 2009:

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

Question 12

Based on the period of 1926 through 2009,_____ have tended to outperform other securities over the long-term.

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

Question 13

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

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

Question 14

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2009?

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

Question 15

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

A)positive square root of the variance.
B)variance squared.
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 16

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 17

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 18

The average risk premium on U.S.Treasury bills over the period of 1926 to 2009 was _______%.

A)0.0
B)1.5
C)2.6
D)3.2
E)3.5

Question 19

Over the period of 1926 through 2009,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; long-term government bonds
C)long-term corporate bonds; small company stocks
D)large company stocks; long-term corporate bonds
E)U.S.Treasury bills; small company stocks

Question 20

Over the period of 1926 to 2009,the average rate of inflation was _______%.

A)2.0
B)3.1
C)3.5
D)3.8
E)4.3

Question 21

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 22

You purchased 250 shares of Deltona,Inc.stock for $44.40 a share.You have received a total of $630 in dividends and $12,040 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)8.47%
E)8.91%

Question 23

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)none of the above are correct

Question 24

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 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 25

Six months ago,you purchased 100 shares of stock in ABC Co.at a price of $44.89 a share.ABC stock pays a quarterly dividend of $.15 a share.Today,you sold all of your shares for $46.23 per share.What is the total amount of your capital gains on this investment?

A)$1.24
B)$1.64
C)$40.00
D)$134.00
E)$154.00

Question 26

A year ago,you purchased 300 shares of IXC Technologies,Inc.stock at a price of $9.05 per share.The stock pays an annual dividend of $.12 per share.Today,you sold all of your shares for $29.14 per share.What is your total dollar return on this investment?

A)$5,703
B)$6,063
C)$6,453
D)$6,563
E)$6,603

Question 27

Winslow,Inc.stock is currently selling for $40 a share.The stock has a dividend yield of 2.8%.How much dividend income will you receive per year if you purchase 600 shares of this stock?

A)$152
B)$390
C)$672
D)$760
E)$1,053

Question 28

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 29

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 30

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)$.40
B)$1.60
C)$2.10
D)$2.50
E)$3.70

Question 31

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 32

The Zolo Company 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 33

Eight months ago,you purchased 400 shares of Winston,Inc.stock at a price of $56.90 a share.To date the company has paid quarterly dividends of $.55 a share twice.Today,you sold all of your shares for $49.40 a share.What is your total percentage return on this investment?

A)-11.2%
B)-9.3%
C)-8.4%
D)12.0%
E)13.4%

Question 34

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 can not exist.

Question 35

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 36

You purchased 100 shares of stock at a price of $35.72 per share.Over the last year,you have received total dividend income of $312.What is the dividend yield?

A)3.2%
B)4.4%
C)8.7%
D)9.2%
E)11.4%

Question 37

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 38

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 39

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 2004.
IV.had an average value of about 20% for the period 1926 to 2004.

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 40

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

Question 41

What are the arithmetic and geometric average returns for a stock with annual returns of 4%,10%,-6%,and 19%?

A)5.89%; 6.25%
B)6.25%; 5.89%
C)6.75%; 6.35%
D)8.3%; 5.89%
E)8.3%; 6.25%

Question 42

You bought 100 shares of stock at $25 each.At the end of the year,you received a total of $500 in dividends,and your stock was worth $2,500 total.What was total dollar capital gain and total dollar return?

A)$0; $500
B)$400; $900
C)$500; $900
D)$900; $2,500
E)None of the above.

Question 43

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 44

If the expected return on the market is 11.5%,then using the historical risk premium on large stocks of 8.6%,the current risk-free rate is:

A)2.9%
B)7.4%
C)8.4%
D)10.6%
E)12.6%

Question 45

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)8.8%; 6.1%
E)8.6%; 6.3%

Question 46

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 47

The total annual returns on large company common stocks averaged 11.8% from 1926 to 2009 small company stocks averaged 16.6%,long-term government bonds averaged 5.8%,while Treasury Bills averaged 3.7%.What was the average risk premium earned by long-term government bonds and small company stocks,respectively?

A)1.8%; 11.9%
B)2.1%; 12.9%
C)4.4%; 13.9%
D)9.5%; 1.8%
E)None of the above.

Question 48

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 49

The return 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 50

The returns 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 51

A stock has an expected rate of return of 7.3% and a standard deviation of 5.4%.Which one of the following best describes the probability that this stock will lose 9% 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 52

Excelsior shares are currently selling for $25.75 each.You bought 200 shares one year ago at $24 and received dividend payments of $1.60 per share.What was your percentage capital gain this year?

A)4.17%
B)6.80%
C)10.42%
D)104.17%
E)110.42%

Question 53

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 54

You bought 100 shares of stock at $25 each.At the end of the year,you received a total of $500 in dividends,and your stock was worth $2,500 total.What was your total return?

A)zero
B)20%
C)50%
D)90%
E)None of the above.

Question 55

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 56

Kids Toy Co.has had total returns over the past five years of -4%,7%,-2%,19%,and 12%.What was the arithmetic average return on this stock?

A)5.40%
B)5.50%
C)6.15%
D)6.40%
E)6.75%

Question 57

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 58

A stock had returns of 8%,12%,-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)5.9%
D)7.3%
E)8.2%

Question 59

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 total rate of return?

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

Question 60

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 61

The long term inflation rate average was 3.1% and you invested in long term corporate bonds over the same period which earned 6.2%.What was the average risk premium you earned?

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

Question 62

What is the difference between arithmetic average and geometric mean?
Is one better than the other to use in financial analysis?

Question 63

The market portfolio of common stocks earned 14.2% in one year.Treasury bills earned 5.5%.What was the real risk premium on equities?

A)5.0%
B)8.7%
C)9.0%
D)12.2%
E)19.7%

Question 64

The return pattern on your favorite stock has been 5%,8%,-12%,15%,21% over the last five years.What was 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 the above.

Question 65

The market portfolio of common stocks earned 11.3% in one year.Treasury bills earned 3.1%.What was the real risk premium on equities?

A)2.90%
B)3.25%
C)3.57%
D)8.20%
E)14.40%

Question 66

What are the lessons learned from capital market history?
What evidence is there to suggest these lessons are correct?

Question 67

Suppose you have $30,000 invested in the stock market and your banker comes to you and tries to get you to move that money into the bank's certificates of deposit (CDs).He explains that the CDs are 100% government insured and that you are taking unnecessary risks by being in the stock market.How would you respond?

Question 68

The return 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%

Question 69

The long term inflation rate average was 2.7% and you invested in long term corporate bonds over the same period which earned 5.8%.What was the average risk premium you earned?

A)3.1%
B)3.7%
C)9.5%
D)9.9%
E)None of the above.

Question 70

You have a sample of returns observations for the Malta Stock Fund.The 4 returns are 0.0725,0.056,0.125,0.010.What is the average return and variance of these returns?

A)6.50%; .00169
B)6.60%; .00225
C)6.60%; .000475
D)26.35%; .00676
E)None of the above.

Question 71

You earned a total return of -5% on NoDotCom this year,earned -40% last year,and earned 30% two years ago.Calculate both the three-year holding period return and the average three year return.

Question 72

The return pattern on your favorite stock has been 7%,10%,-14%,10%,16% over the last five years.What has your average return and holding period return over the last 5 years?

A)5.8%; 5.8%
B)5.8%; 29.2%
C)9.4%; 7.2%
D)9.4%; 35.8%
E)None of the above.

Question 73

You have a sample of returns observations for the Malta Stock Fund.The 4 returns are 0.06,0.05,0.12,0.01.What is the average return and variance of these returns?

A)6.0%; .000454
B)6.0%; .002067
C)6.5%; .000675
D)24.0%; .000712
E)None of the above.

Question 74

Little John Industries sold for $1.90 on January 1 and ended the year at a price of $2.50.In addition,the stock paid dividends of $0.20 per share.Calculate Little John's dividend yield,capital gain yield,and total rate of return for the year.

Question 75

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 76

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?