Question 1

The arithmetic average return on your portfolio for the past five years was 8.4 percent.Assume you earned -6 percent,25 percent,10 percent,and 6 percent for four of those five years.What rate of return did you earn in the fifth year?

Accepted Answer

A) 5.0% 
B) 6.0% 
C) 7.5% 
D) 7.0% 
E) 10.0%

Question 2

Assume today is December 31,2012.Approximately how long has it been since the annual rate of inflation as measured by the Consumer Price Index has been negative?

Accepted Answer

A) Less than 10 years 
B) Between 10 and 30 years 
C) Between 30 and 50 years 
D) Between 50 and 70 years 
E) Over 70 years

Question 3

Assume you are analyzing stock market risk premiums over time.Which one of these would be the computation to use to compute the standard error of those premiums?

Accepted Answer

A) Variance1/2 
B) Variance/(Number of observations - 1) 
C) Σ Deviations2 
D) Σ Deviations2/(Number of observations - 1) 
E) SD(R)/Number of observations1/2

Question 4

Deltona stock sold for $38.60 a share one year ago and pays an annual dividend of $1.55.What does the stock price need to be today for the annual capital gain to be 7.5 percent?

Accepted Answer

A) $39.95 
B) $40.08 
C) $41.50 
D) $41.63 
E) $43.18

Question 5

Kurt's Toy Co.has had total annual returns for the past five years of -5 percent,8 percent,-3 percent,20 percent,and 12 percent.What is the 5-year holding period return?

Accepted Answer

A) 42.03% 
B) 5.50% 
C) 6.40% 
D) 33.76% 
E) 36.75%

Question 6

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

Accepted Answer

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.

Question 7

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

Accepted Answer

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

Question 8

One year ago,Ceegee purchased 200 shares of stock at a price of $18.97 per share.Over the last year,she received total dividend income of $164.What is the dividend yield?

Accepted Answer

A) 3.20% 
B) 4.32% 
C) 8.22% 
D) 8.65% 
E) 9.14%

Question 9

You just sold 250 shares of stock for $37.75 a share.One year ago,you purchased the stock for $40.50 a share and have received dividends totaling $2.64 per share.What is your capital gain in dollars?

Accepted Answer

A) -$687.50 
B) -$975.50 
C) $687.50 
D) $975.50 
E) $1,347.50

Question 10

A stock had returns of 14 percent,3 percent,9 percent,and -12 percent annually for the past four years.What is the mean and variance of these returns?

Accepted Answer

A) 3.50%;.0069 
B) 3.50%;.0127 
C) 3.50%;.0381 
D) 9.50%;.0100 
E) 9.50%;.0033

Question 11

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

Accepted Answer

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

Question 12

What is the difference between an arithmetic and a geometric average? Is one preferred over the other?

Accepted Answer

The answer of What is the difference between an arithmetic...

Question 13

Which one of these statements must be correct?

Accepted Answer

A) Long-term expected rates of return are inversely related to risk premium. 
B) The lower the risk premium the higher a security's average rate of return. 
C) Risk premium is defined as the nominal rate of return minus the rate of inflation. 
D) One security can have both a higher standard deviation and a lower risk premium than another security for the same historical period. 
E) A security with a standard deviation of 9.9 percent for a stated historical period will have a higher average rate of return for that period than a security with a standard deviation of 9.6 percent.

Question 14

Suppose you have $100,000 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 percent government insured and you are taking unnecessary risks by being in the stock market.How would you respond?

Accepted Answer

The answer of Suppose you have $100,000 invested in the...

Question 15

Assume a $1 investment in a stock 65 years ago is now worth $211.46.What is the geometric average return for the period?

Accepted Answer

A) 8.59% 
B) 9.16% 
C) 9.58% 
D) 10.24% 
E) 11.06%

Question 16

What are the arithmetic and geometric average returns for a stock with annual returns of 11 percent,14 percent,-2 percent and 6 percent?

Accepted Answer

A) 8.25%;8.15% 
B) 8.25%;7.89% 
C) 7.25%;7.37% 
D) 7.25%;8.15% 
E) 7.25%;7.08%

Question 17

The return pattern on your favorite stock has been 9 percent,8 percent,-2 percent,15 percent,and 21 percent over the last five years.What is the stock's arithmetic average return and holding period return?

Accepted Answer

A) 10.20%;8.24% 
B) 10.20%;60.53% 
C) 8.24%;10.20% 
D) 8.24%;60.53% 
E) 8.25;48.62%

Question 18

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

Accepted Answer

A) Decrease greater than 15 percent 
B) Decrease between 5 and 15 percent 
C) Change between -5 and +5 percent 
D) Increase between 5 and 15 percent 
E) Increase greater than 15 percent

Question 19

Assume that for a 10-year period inflation averaged 2.8 percent,U.S.Treasury bills returned 3.3 percent,and long-term corporate bonds earned 5.9 percent.What was the real rate of return on long-term corporate bonds for the period?

Accepted Answer

A) 2.8% 
B) 3.1% 
C) 9.5% 
D) 9.9% 
E) -.2%

Question 20

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.

Accepted Answer

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

Exam 10: Risk and Return Lessons From Market History