Deck 11: Risk and Return in Capital Markets

Question 1

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) -1.46%
B) 2.91%
C) 0.00%
D) 1.46%

Answer 1

-1.46%

Question 2

Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Greg's return on his investment?

A) -87.50%
B) -113.75%
C) -100.62%
D) -96.25%

Answer 2

-87.50%

Question 3

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95. What was your dividend yield and capital gains yield on the investment?

A) 2%, -5%
B) 2%, 5%
C) -2%, 5%
D) 5%, 2%

Answer 3

2%, -5%

Question 4

Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment?

A) 0.54%, 1.13%
B) 0.57%, 1.08%
C) 0.57%, 1.13%
D) 1.08%, 1.18%

Question 5

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

A) small stocks
B) Treasury bills
C) S&P 500
D) corporate bonds

Question 6

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

A) Treasury bills
B) S&P 500
C) small stocks
D) corporate bonds

Question 7

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

A) small stocks
B) S&P 500
C) corporate bonds
D) Treasury bills

Question 8

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

Question 9

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed?

A) 47.83%
B) 33.48%
C) 50.22%
D) 45.43%

Question 10

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

Question 11

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?

A) $119.43
B) $103.14
C) $108.57
D) $114.00

Question 12

Stocks with high returns are expected to have ________.

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

Question 13

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment?

A) 6.57%
B) 7.51%
C) 9.38%
D) 10.32%

Question 14

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 prefer fluctuations

Question 15

Rational investors ________ fluctuations in the value of their investments.

A) are averse to
B) prefer
C) are indifferent to
D) are in favor of

Question 16

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?

A) 2%, 2%
B) 0%, 2%
C) 3%, 2%
D) 2%, 0%

Question 17

Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) -4.45%
B) -7.12%
C) -5.12%
D) 0%

Question 18

In the United States over the long term, small stocks have provided the highest return followed by the large stocks in the S&P 500.

Question 19

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment?

A) -20.72%
B) -$15.94%
C) -18.33%
D) -17.53%

Question 20

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment?

A) 8.76%
B) 13.76%
C) 12.51%
D) 10.01%

Question 21

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________.

A) 15.17%
B) 11.67%
C) 12.83%
D) 16.33%

Question 22

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) 60.57%
B) 67.30%
C) 53.84%
D) 74.03%

Question 23

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%

Question 24

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

Question 25

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years?

A) 10.50%
B) 13.13%
C) 8.75%
D) 9.63%

Question 26

You purchase a 30-year, zero-coupon bond for a price of $25. 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) 4.49%
B) 5.68%
C) 4.02%
D) 4.73%

Question 27

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________.

A) 1.55%
B) 1.03%
C) 0.90%
D) 1.29%

Question 28

Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford?

A) 24.65%
B) 32.86%
C) 27.39%
D) 30.12%

Question 29

Bear Stearns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________.

A) $30.07
B) $49.40
C) $42.96
D) $34.37

Question 30

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

A) 12.75%
B) 14.25%
C) 13.50%
D) 15.00%

Question 31

The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years?

A) -5%
B) 0%
C) 5%
D) 3%

Question 32

The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is ________.

A) 9.08%
B) 8.65%
C) 8.22%
D) 9.52%

Question 33

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) 8.28%
B) 12.43%
C) 14.08%
D) 16.57%

Question 34

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 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%

Question 35

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

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

Question 36

The standard deviation of returns of ________. I. small stocks is higher than that of large stocks
Which statement is true?

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

Question 37

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?

A) 3.00%
B) 3.50%
C) 2.25%
D) 2.50%

Question 38

IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM?

A) -5.62%
B) -4.49%
C) -4.72%
D) -4.94%

Question 39

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample?

A) 5.77%
B) 5.20%
C) 6.06%
D) 4.62%

Question 40

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same.

A) same as
B) higher than
C) lower than
D) always same as

Question 41

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT?

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

Question 42

McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52. What was your realized return from holding McCoy?

A) 4.24%
B) 6.36%
C) 33.91%
D) 42.38%

Question 43

Which type of investment has historically had the lowest volatility?

Question 44

Consider the following price and dividend data for Quicksilver Inc.: Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it at the closing price on December 30, 2005. Your realized annual return for the year 2005 is closest to ________.

A) -47.4%
B) -45.1%
C) -42.9%
D) -40.6%

Question 45

The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

A) -12.5%, 17.5%
B) -15%, 25%
C) -25%, 35%
D) -25%, 25%

Question 46

Consider the following price and dividend data for Quicksilver Inc.: Assume that you purchased Quicksilver's 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) -7.80%
B) -8.53%
C) 0.74%
D) 0.81%

Question 47

Consider the following realized annual returns: The average annual return on the S&P 500 from 1996 to 2005 is closest to ________.

A) 8.68%
B) 4.34%
C) 5.21%
D) 9.55%

Question 48

The average annual return over the period 1926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns?

A) -1.3%, 20.5%
B) -8.6%, 34.2%
C) -25.8%, 54.7%
D) -25.8%, 47.9%

Question 49

The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

A) -13.25%, 22.75%
B) -16.5%, 35.5%
C) -26.5%, 45.5%
D) -11.5%, 30.5%

Question 50

Consider the following price and dividend data for Quicksilver Inc.: Assume that you purchased Quicksilver's 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) 0.97%
B) -4.00%
C) -4.97%
D) 1.06%

Question 51

McCoy paid a one-time special dividend of $3.20 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $62.93. What was your capital gain yield from holding McCoy?

A) 4.07%
B) 6.11%
C) 33.89%
D) 40.70%

Question 52

The average annual return for the S&P 500 from 1886 to 2006 is 15%, with a standard deviation of 25%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

A) -35%, 65%
B) -17.5%, 32.5%
C) -25%, 55%
D) -20%, 50%

Question 53

The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

A) -10.6%, 31.8%
B) 0%, 42.4%
C) -21.2%, 42.4%
D) -21.2%, 63.6%

Question 54

Which of the following statements is FALSE?

A) The geometric average return is a better description of the long-run historical performance of an investment.
B) The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns.
C) The compounded geometric average return is most often used for comparative purposes.
D) We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance.

Question 55

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

A) -1.5%, 21.8%
B) -10.7%, 32.8%
C) -30.6%, 54.6%
D) -30.6%, 76.4%

Question 56

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) R_annual = (1 + R₁) (1 + R₂) (1 + R₃)( 1 + R₄) - 1
B) R_annual = R₁ + R₂ + R₃ + R₄
C) R_annual = (1 + R₁) (1 + R₂)( 1 + R₃)( 1 + R₄)
D) R_annual =

Question 57

Which type of investment has historically had the highest volatility?

Question 58

Consider the following price and dividend data for Quicksilver Inc.: Assume that you purchased Quicksilver's 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) 0.93%
B) 1.02%
C) -3.85%
D) -2.93%

Question 59

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

Question 60

Consider the following realized annual returns: The average annual return on IBM from 1996 to 2005 is closest to ________.

A) 18.48%
B) 16.07%
C) 19.28%
D) 28.93%

Question 61

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

Question 62

Which of the following statements is FALSE?

A) On average, larger stocks have higher volatility than smaller stocks.
B) Portfolios of large stocks are typically less volatile than individual large stocks.
C) On average, smaller stocks have higher returns than larger stocks.
D) On average, Treasury Bills have lower returns than corporate bonds.

Question 63

Consider the following average annual returns: What is the excess return for corporate bonds?

A) 2.6%
B) 1.3%
C) 5.2%
D) 0%

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

Consider the following average annual returns: What is the excess return for the S&P 500?

A) 11.5%
B) 16.3%
C) 0%
D) 9.3%

Question 70

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 71

Which of the following statements is FALSE?

A) Expected return should rise proportionately with volatility.
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return.
C) Smaller stocks have lower volatility than larger stocks.
D) The largest stocks are typically more volatile than a portfolio of large stocks.

Question 72

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 73

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) mode, mean return

Question 74

Consider the following average annual returns: What is the excess return for Treasury bills?

A) 0%
B) -9.1%
C) -3.2%
D) -2.4%

Question 75

The excess return is the difference between the average return on a security and the average return for ________.

A) Treasury bonds
B) a portfolio of securities with similar risk
C) a broad-based market portfolio like the S&P 500 index
D) Treasury bills

Question 76

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________.

A) not perfectly positively correlated
B) perfectly correlated
C) susceptible to common risks only
D) both B and C

Question 77

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 stocks.

Question 78

Consider the following average annual returns: What is the excess return for the portfolio of small stocks?

A) 11.7%
B) 16.6%
C) 19.5%
D) 17.6%

Question 79

Which of the following statements is FALSE?

A) Investments with higher volatility have rewarded investors with higher average returns.
B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns.
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.
D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

Question 80

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