Deck 9: Risk and Return: Lessons From Market History

Question 1

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, 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.

Answer 1

Treasury bills, small company shares, large company shares.

Question 2

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.

Answer 2

the purchase price is less than the selling price.

Question 3

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.

Answer 3

the dividend yield will increase.

Question 4

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 5

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 6

If we assume that the standard deviation on Company A's shares is greater than that on Company B's shares, this indicates that:
I.the required rate of return on Company A's shares is higher than that on Company B's shares.
II.the required rate of return on Company A's shares is lower than that on Company B's shares.
III.the potential loss from Company A's shares is greater than that from Company B's shares.
IV.the potential loss from Company A's shares is smaller than that from Company B's shares.
V.there is no difference between the required rate of return on and potential loss from Company A's
Shares and those associated with Company B's shares.

A)I and III only.
B)I and II only.
C)II and III only.
D)II and IV only.
E)V only.

Question 7

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 8

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 9

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 10

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 11

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 12

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 13

In theory, the return you earn from government bonds (Treasury bills, or T-bills) which virtually have no default risk over a short time (one year or less) is called the:

A)geometric average return.
B)inflation premium.
C)risk premium.
D)risk-free return.
E)arithmetic average return.

Question 14

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 15

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 16

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 17

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 18

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 19

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 20

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

Question 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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

Question 38

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 39

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 40

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 41

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 42

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 43

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 44

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%; 0.23%
C)6.60%; 4.75%
D)26.35%; 67.6%
E)None of the above.

Question 45

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 46

Assuming no dividends were paid, what was the 3-year holding period return on a share 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 47

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 48

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 49

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 50

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 51

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 52

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 53

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

Question 54

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 55

From 1926 to 2005, the total annual returns on large company US ordinary shares averaged 12.4%, small company shares averaged 17.5%, long-term government bonds averaged 5.8% and Treasury
Bills averaged 3.8%.What was the average risk premium earned by long-term government bonds
And small company shares respectively during that period of time?

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 56

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 57

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.