Deck 9: Risk and Return: Lessons From Market History

Question 1

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2005 for US securities? Rank from highest to lowest.

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

Answer 1

small company shares,large company shares,long-term corporate bonds

Question 2

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 2

arithmetic

Question 3

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

Answer 3

normal

Question 4

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

Question 5

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

A)equity of the firms which represent the smallest 20% of the companies
B)government treasury bills
C)long-term corporate bonds
D)equities of firms included in the FTSE 100 index
E)long-term government bonds

Question 6

The standard deviation for a set of equity 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 7

The average annual return on small company shares was about _____ percentage points greater than the average annual return on large-company shares over the period of 1926 to 2005 in the US.

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

Question 8

Over the period of 1926 through 2005 in the US,the annual rate of return on _____ has been more volatile than the annual rate of return on_____.

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

Question 9

Over the period of 1926 to 2005 in the US,small company shares had an average return of __ %.

A)8.8
B)10.2
C)12.4
D)14.6
E)17.4

Question 10

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.

Question 11

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2005 in the US?

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

Question 12

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 13

Over the period of 1926 to 2005 in the US,the average rate of inflation was _____ %.

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

Question 14

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 15

Based on the period of 1926 through 2005 in the US,_____ have tended to outperform other securities over the long-term.

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

Question 16

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 17

The average annual return on long-term corporate bonds for the period of 1926 to 2005 in the US was _____ %.

A)3.8
B)5.8
C)6.2
D)7.9
E)8.4

Question 18

The average risk premium on U.S.Treasury bills over the period of 1926 to 2005 was _____ %.

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

Question 19

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 20

On average,for the period 1926 through 2005 in the US:

A)the real rate of return on U.S.Treasury bills has been negative.
B)small company shares have underperformed large company shares.
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 shares has exceeded the risk premium on small company shares.

Question 21

Six months ago,you purchased 1,200 shares of ABC plc 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 monetary return on this investment?

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

Question 22

The standard deviation on small US company shares:
I.is greater than the standard deviation on large company shares.
II.is less than the standard deviation on large company shares.
III.had an average value of about 33 % for the period 1926 to 2005.
IV.had an average value of about 20 % for the period 1926 to 2005.

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

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

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

Question 24

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 25

Today,you sold 200 shares of SLG plc.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 26

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 27

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

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

Question 28

You purchased 300 shares of Deltona 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?

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

Question 29

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

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

Question 30

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 31

Eight months ago,you purchased 400 shares of Winston plc 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 32

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 33

Zolo plc just declared that it is increasing its annual dividend from £1.00 per share to £1.25 per share.If the share 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 34

Winslow plc is currently selling for £40 a share.The equity has a dividend yield of 3.8%.How much dividend income will you receive per year if you purchase 500 shares?

A)£152
B)£190
C)£329
D)£760
E)£1,053

Question 35

Six months ago,you purchased 100 shares of ABC plc at a price of £43.89 a share.ABC 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

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 37

You just sold 200 shares of Langley at a price of £38.75 a share.Last year you paid £41.50 a share to buy this equity.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 38

You purchased 200 shares at a price of £36.72 each.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 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

One year ago,you purchased a stock at a price of £32.50.The equity pays quarterly dividends of £.40 per share.Today,the shares are worth £34.60.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 41

What are the arithmetic and geometric average returns for a share 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 42

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

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

Question 43

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

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

Question 44

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

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

Question 45

A share had the following prices and dividends.What is the geometric average return on this share?
$\begin{array}{|l|l|l|}\hline \text { Year } & \text { Price } & \text { Dividend } \\\hline 1 & £ 23.19 & -\\\hline 2 & £ 24.90 & £ 0.23 \\\hline 4 & £ 23.18 & £ 0.24 \\\hline 4 & £ 24.86 & £ 0.25 \\\hline\end{array}$

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

Question 46

Over the past five years,a share produced returns of 14%,22%,-16%,2%,and 10%.What is the probability that an investor in this share 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 47

What are the arithmetic and geometric average returns for a share 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 48

A share 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

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 50

An equity had returns of 8%,14%,and 2% for the past three years.Based on these returns,what is the probability that this equity 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 51

A share had returns of 8%,39%,11%,and -24% for the past four years.Which one of the following best describes the probability that this share 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 52

The total annual returns on large company US ordinary shares averaged 12.4% from 1926 to 2005 small company shares averaged 17.5%,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 shares respectively?

A)1.8%; 13.3%
B)2.0%; 13.7%
C)4.4%; 11.9%
D)9.5%; 1.8%
E)None of the above.

Question 53

If the expected return on the market is 16%,then using the historical risk premium on large shares 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 54

A equity 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 equity 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

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 56

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 57

An equity 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 equity 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 58

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

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

Question 59

An equity 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 60

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 61

The return pattern on your favorite share has been 5%,8%,-12%,15%,21% over the last five years.What has 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 62

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 the above.

Question 63

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 64

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 the above.

Question 65

Little John Industries sold for £1.90 on January 1 and ended the year at a price of £2.50.In addition,the equity 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 66

The market portfolio of equities 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 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 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%

Question 69

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

Question 70

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 71

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%.