CH. 10 Fin Exam 2

If stock GHI has an initial price of $100 and the price two years later is $132, what is GHI's geometric mean rate of return? 13.32% 15.00% 17.69% 14.89%

$132/$100)^1/2 - 1 = 14.89%

If your total dollar return was $7 and your dividend was $2, then the price change on your stock must have been ______. +$5 -$5 -$9 +$9

+$5

In 2017, the U.S. stock market represented about ______ percent of the world stock market capitalization. 65 42 73 41

41

Going back to 1802, the U.S. historical risk premium is, on average, about ____ percent. 7.4 5.2 6.8 3.9

5.2

What is the approximate standard deviation of the returns on an average stock? 17% 50% 25% 20%

50%

The ______ period rate of return is simply the rate of return over some arbitrary investment period. cumulative carryover total holding

HOLDING

Dividends are the ______ component of the total return from investing in a stock. A) capital gains B) price appreciation C) amortization D) income

INCOME

The two potential ways to make money as a stockholder are through _______ and capital appreciation. A) interest payments B) coupon payments C) bankruptcy distributions D) dividends

dividends

The arithmetic mean A) takes into account compounding. B) is a very useful measure of past performance. C) tells you what you actually earned per year on average. D) is a very useful measure of expected future yearly returns. E) tells you what you earned in a typical year.

is a very useful measure of expected future yearly returns. tells you what you earned in a typical year.

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.

risk premium

Which of the following is considered risk-free? Small-company stocks U.S. Treasury bills Long-term corporate bonds Large-company stocks

US Treasury bills

In the Ibbotson-Sinquefield studies, the large-company common stock portfolio is based on the A) Wilshire 5000 index. B) sample of the smallest Canadian companies by market cap. C) Dow Jones Industrial Average by price value. D) S&P Composite Index.

S&P Composite Index

A stock has annual returns of 15 percent, 32 percent, and -25 percent.What is the 3-year holding period return? 13% 13.85% 22% 14.24%

(1.15 × 1.32 × .75) - 1 = 13.85%

What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc. for $32? $6,400 Unlimited $1,600 $3,200

The maximum loss occurs when the stock price falls to $0. ($32 - $0) × 200 shares = $6,400

One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?

($114 - $100 + $1)/$100 = 15%

Which of the following is true of the average return on the stock market? It is compared with the returns on other securities. It is used to determine the returns on other securities. It is an average of risk-free securities.

It is compared with the returns on other securities

Which of the following are true of the average return? A) It summarizes the history of returns. B) It summarizes future returns. C) It is the best estimate of the return that an investor could realize in a particular year. D) It is the best estimate of the return that an investor will realize in a future period.

It summarizes the history of returns. It is the best estimate of the return that an investor could realize in a particular year.

You bought one share of stock for $100 and received a $2 dividend. If the price of the stock rose to $103, then your total dollar return would be ______.

$103 - $100 + $2 = $5

Given a normal distribution, assume you want to earn a rate of return that plots more than three standard deviations above the mean. What is your probability of earning such a return in any one year? A) .14 percent or less B) .15 to .25 percent C) .26 to .50 percent D) .51 to 1 percent E) More than 1 percent

.14% or less

The probability of a return being more than two standard deviations below the mean in a normal distribution is approximately ___ percent. 2.5 5 95 16

2.5%

What is the arithmetic average return for a mutual fund that reported a return of 5% every year for the last 3 years? 10% 5% 15% 3%

Arithmetic average = (5%+5%+5%)/3 = 5%.

Which of the following are true of a frequency distribution of stock returns? Multiple Select: A) The height of the graph gives the range of the returns. B) The horizontal axis of the graph gives the range of the returns. C) The height of the graph gives the number of sample observations. D) The horizontal axis of the graph gives the number of sample observations.

The horizontal axis of the graph gives the range of the returns. The height of the graph gives the number of sample observations.

You buy a stock for $50. After one year, its price rises to $55, and it pays a $2 dividend.. You do not sell the stock. Your capital gains yield is _____

($55 - $50)/$50 = 10%

The standard deviation for large-company stock returns for the period 1926 to 2018 is ___. . 8.4% 11.9% 6.3% 19.8%

19.8%

Going back to 1900, the U.S. historical equity risk premium is, on average ___ percent, 9.4 4.3 6.8 7.2

7.2

The probability of a return being within ± two standard deviations of the mean in a normal distribution is approximately ___ percent. 95 68 34 99

95%

Which of the following are true about the historical equity risk premiums of the countries studied by Dimson, Marsh, and Staunton? The world average equity risk premium was 10.2 percent. The world average equity risk premium was 4.6 percent. Denmark had the lowest equity risk premium Italy had the highest equity risk premium.

Denmark had the lowest equity risk premium Italy had the highest equity risk premium.

Which one of the following values cannot be negative? A) Capital gain B) Total dollar return C) Holding period return D) Dividend yield

Dividend Yield

Which of the following are ways to make money by investing in stocks? Multiple select question. Dividends Amortization Capital gains Interest

Dividends Capital Gains

Which one of these statements is correct? A) Treasury bills outperformed inflation every year during the period 1926-2015. B) Small-company stocks outperformed large-company stocks every year during the period 1926-2015. C) On an annual basis, small-company stocks had more consistent rates of return than did large-company stocks for the period 1926-2015. D) The inflation rate has been positive every year during the period 1926-2015. E) During the 1930s (Great Depression), long-term government bonds produced a relatively stable rate of return relative to large-company stocks.

During the 1930s (Great Depression), long-term government bonds produced a relatively stable rate of return relative to large-company stocks.

In the Ibbotson-Sinquefield studies, the small stock portfolio includes the bottom _________ of NYSE listed stocks. 10% fifth 50% 25% third

FIFTH

Suppose a portfolio had an arithmetic average return of 8 percent for a 4-year period. Which one of these statements must be true regarding this portfolio for the period? A) At least one of the 4 years produced an annual rate of return of 8 percent. B) If the standard deviation of the portfolio is greater than zero, then the geometric average portfolio return is less than 8 percent. C) The standard deviation of the portfolio must be lower than the standard deviation of a comparable portfolio that had an arithmetic average return of 9 percent. D) If the standard deviation of the portfolio is zero, then the geometric average return must also be zero. E) The holding period return must be less than 8 percent

If the standard deviation of the portfolio is greater than zero, then the geometric average portfolio return is less than 8 percent.

You are comparing the returns of two portfolios for a 10-year period. Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II. Given this, what do you know with certainty? A) Portfolio I has a lower standard deviation than Portfolio II. B) Portfolio I is riskier than Portfolio II. C) Portfolio II has less total risk than Portfolio I. D) Portfolio I will outperform Portfolio II over the next 10 years. E) Portfolio II consists of more individual stocks than Portfolio I.

Portfolio I has a lower standard deviation than Portfolio II

If the risk premium of stock JKL is 5 percent while the standard deviation is 10 percent, then the Sharpe ratio equals ______. 0.50 1.00 2.00 0.75

Reason: Sharpe ratio = .05/.1 = .5

Based on the period 1926 to 2018, which category of securities has outperformed all of the other categories? A) Long-term corporate bonds B) U.S. Treasury bills C) Small-company stocks D) Large-company stocks E) Long-term government bonds

Small-company stocks

Assume stocks A and B have had identical stock prices every day for the past three years. Stock A pays a dividend but Stock B does not. Which one of these statements applies to these stocks for the last three years? A) Their annual total rates of return are equal. B) Stock A's total return has been higher than Stock B's every year. C) Stock B's capital gain has exceeded Stock A's every year. D) Stock A's total return had to be positive every year. E) Stock B's holding period return exceeded that of Stock A

Stock A's total return has been higher than Stock B's every year.

What conclusion should you draw from the performance of stocks and bonds over the period 1926 to 2015? A) Bonds have greater volatility than stocks. B) Stock returns have a lower standard deviation than bond returns. C) In any year, stocks will outperform bonds. D) Stock returns have a smaller risk premium than bond returns. E) Stocks are riskier than bonds

Stocks are riskier than bonds

The Ibbotson-Sinquefield data shows that ___. Multiple select question. A) inflation was always higher than the U.S. T-bill yield B) T-bills had the lowest risk or variability C) long-term corporate bonds had less risk or variability than stocks D) large-company stocks had higher returns than small-company stocks

T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks

The Ibbotson-Sinquefield data show that over the long-term, Multiple select question. A) T-bills, which had the lowest risk, generated the lowest return. B) small-company stocks generated the highest average return. C) large-company stocks generated the highest average return. D) small-company stocks had the highest risk level. E) long-term corporate bonds had the lowest risk.

T-bills, which had the lowest risk, generated the lowest return. small-company stocks generated the highest average return. small-company stocks had the highest risk level.

Which of the following is true of the definition of risk? A) It is universally agreed that the mean is the optimal measure of risk. B) There is no universally agreed-upon definition. C) It is determined by the NYSE.

There is no universally agreed-upon definition

A positive capital gain on a stock results from A) a decrease in price. B) an increase in price. C) an increase in the dividend. D) an increase in the coupon rate.

a increase in price

The return earned in a typical year over a multiyear period is called the ________ average return. A) arithmetic B) standard C) variant D) geometric E) real

arithmetic

A very useful measure of expected future yearly returns is(are) A) the arithmetic mean. B) the average of the arithmetic and geometric mean. C) both the arithmetic and geometric means. D) the geometric mean.

arithmetic mean

The Ibbotson-Sinquefield studies deal with rates of return on Multiple Select A) equity investments. B) bonds. C) preferred stocks. D) common stocks. E) Treasury bills.

bonds. common stocks. Treasury bills.

The total dollar return is the sum of dividends and A) percentage returns. B) overall market fluctuations. C) government payouts. D) capital gains or losses.

capital gains or losses

The change in stock price divided by the initial price is the A) dividend yield. B) total dollar return. C) total percentage return. D) capital gains yield.

capital gains yield

When a company declares a dividend, shareholders generally receives A) interest income. B) store credit. C) cash. D) promissory notes.

cash

The total dollar return on a stock is the sum of the ______ and the ______. A) interest payments; dividends B) dividends; capital gains C) capital gains; interest payments

dividends; capital gains

The ______ rate of return is the difference between risky returns and risk-free returns. nominal real excess subliminal

excess

The average compound return earned per year over a multiyear period is called the ________ average return. A) real B) standard C) arithmetic D) variant E) geometric

geometric

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ____. A) initial stock price B) ending stock price C) dividend yield D) cost of capital

initial stock price

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ____. . A) initial stock price B) ending stock price C) dividend yield D) cost of capital

initial stock price

The geometric mean Multiple select question. A) is a very useful measure of past performance. B) tells you what you actually earned per year on average. C) tells you what you earned in a typical year. D) takes into account compounding. E) is a very useful measure of expected future yearly returns.

is a very useful measure of past performance. tells you what you actually earned per year on average. takes into account compounding.

When dealing with the history of capital market returns, an average stock market return is useful because it Multiple Select A) accurately forecasts future short-run returns. B) guarantees the long-term future rate of return. C) is the best estimate of any one year's stock market return during the specified period. D) simplifies detailed market data.

is the best estimate of any one year's stock market return during the specified period. simplifies detailed market data.

A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the ________ distribution. A) gamma B) Poisson C) bimodal D) normal E) uniform

normal

The standard deviation for a set of stock returns can be calculated as the A) variance squared. B) positive square root of the variance. 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.

positive square root of the variance.

Your total year-end value from a one-year investment equals the initial investment plus the total dollar return. It also equals the A) proceeds from the stock sale minus dividends. B) dividends plus the initial investment. C) proceeds from the stock sale plus dividends. D) dividends minus the sale proceeds.

proceeds from the stock sale plus dividends.

The excess return on a risky asset is the difference between the risky return and the ____ rate. inflation prime federal funds risk-free

risk-free

The Ibbotson-Sinquefield studies present year-by-year historical rates for five types of financial instruments. Which of the following are included in those five types? Multiple select question. A) small-company common stocks B) large-company preferred stocks C) large-company common stocks D) U.S. Treasury bills E) short-term U.S. government bonds

small-company common stocks large-company common stocks U.S. Treasury bills

The variance of returns for a portfolio of stocks 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).

squared deviations by (the number of returns minus one).

The average stock has a ______ of about 50 percent. standard deviation mean variance rate of return

standard deviation

The dividend yield for a one-year period is equal to the annual dividend amount divided by the A)stock price at the end of the year. B) stock price at the beginning of the year. C) average stock price for the year.

stock price at the beginning of the year

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

stocks tend to have a higher risk premium than bonds

In the Ibbotson-Sinquefield studies, year-by-year real returns can be calculated by A) adding annual inflation. B) subtracting annual inflation. C) dividing by annual inflation. D) multiplying by annual inflation.

subtracting annual inflation

The risk premium is computed by ________ the average rate of return for an 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

subtracting the average return on U.S. Treasury bills from

A normal distribution has a ______ shape. symmetrical box-like asymmetrical skewed

symmetrical

The dividend yield is A) the dividend expressed as a percentage of the stock price. B) calculated as the dividend for the period divided by the stock price at the beginning of the period. C) calculated as the average stock price for the period divided by the dividend for the period. D) the stock price expressed as a percentage of the dividend.

the dividend expressed as a percentage of the stock price. calculated as the dividend for the period divided by the stock price at the beginning of the period.

The equity risk premium is A) the excess return on common stocks. B) the excess return on long-term corporate bonds. C) the excess return on government bonds. D) the excess return on T-bills.

the excess return on common stocks

A frequency distribution of stock returns displays ____. Multiple select question. A) the average of all data points B) the frequency of occurrence for each rate of return range C) various ranges of returns on the horizontal axis D) the standard deviation of all data points

the frequency of occurrence for each rate of return range various ranges of returns on the horizontal axis

U.S. Treasury bills are considered risk-free because A) their average return over the last decade has been in excess of 10%. B) the stock market enforces a floor on T-bills. C) they are guaranteed by the NYSE. D) the government can raise taxes to pay for the debt it incurs.

the government can raise taxes to pay for the debt it incurs.

The capital gains yield plus the dividend yield on a security is called the A) geometric return. B) total return. C) average period return. D) variance of returns. E) current yield.

total return