Chapter 1

Based on the period of 1926-2009, the risk premium for small-company stocks averaged:

13.9 percent.

The average risk premium on long-term corporate bonds for the period 1926-2009 was:

2.7 percent

If you multiply the number of shares of outstanding stock for a firm by the price per share, you are computing the firm's

market capitalization.

The geometric return on an investment is approximately equal to the arithmetic return:

minus half the variance.

Which one of the following is considered the best method of comparing the returns on various- sized investments?

percentage return

Which one of the following statements is correct based on the historical returns for the period 19262009?

The inflation rate exceeded the rate of return on Treasury bills during some years.

Which one of the following had the narrowest bell curve for the period 1926-2009?

U. S. Treasury bills

You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is:

greater than the geometric average return.

The wider the distribution of an investment's returns over time, the _____ the expected average rate of return and the ______ the expected volatility of those returns.

higher; higher

A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n):

normal distribution.

Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2009?

only small-company stocks

The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the:

risk-free rate

The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution.

68

The average risk premium on large-company stocks for the period 1926-2009 was:

7.9 percent.

An annualized return:

is computed as (1 + holding period percentage return)m, where m is the number of holding periods in a year.

The total dollar return on a share of stock is defined as the:

capital gain or loss plus any dividend income.

Which one of the following should be used to compare the overall performance of three different investments?

effective annual return

When the total return on an investment is expressed on a per-year basis it is called the:

effective annual return.

The average compound return earned per year over a multiyear period is called the:

geometric average return

Which one of the following had the smallest standard deviation of returns for the period 1926-2009?

long-term corporate bonds

When we refer to the rate of return on an investment, we are generally referring to the:

total percentage return.

The standard deviation is a measure of:

volatility

For the period 1926-2009, long-term government bonds had an average return that ______ the average return on long-term corporate bonds while having a standard deviation that _______ the standard deviation of the long-term corporate bonds.

was less than; exceeded

For the period 1926-2009, the annual return on large-company stocks:

was unpredictable based on the prior year's performance

Capital gains are included in the return on an investment:

whether or not the investment is sold.

The capital gains yield is equal to:

(Pt + 1 - Pt)/Pt.

Based on the period 1926-2006, the risk premium for U.S. Treasury bills was:

0.0 percent.

Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before reselling it. What is the value of "m" when computing the annualized return on this investment?

3.00

One year ago, you purchased 100 shares of Southern Foods common stock for $40.7 a share. Today, you sold your shares for $39.70 a share. During this past year, the stock paid $1.40 in dividends per share. What is your dividend yield on this investment?

3.44 percent

Which one of the following statements is correct concerning the dividend yield and the total return?

The total return can be negative but the dividend yield cannot be negative.

Which one of the following statements is correct?

The variance is a means of measuring the volatility of returns on an investment.

The risk premium is defined as the rate of return on:

a risky asset minus the risk-free rate.

Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return?

arithmetic average return for the period

The average compound return earned per year over a multiyear period when inflows and outflows are considered is called the:

dollar-weighted average return.

Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:

increase the standard deviation of the portfolio.

The dividend yield is defined as the annual dividend expressed as a percentage of the:

initial stock price.

The geometric mean return on large-company stocks for the 1926-2009 period:

is less than the arithmetic mean return.

BLOOM'S formula is used to:

predict future rates of return.

The arithmetic average return is the:

return earned in an average year over a multiyear period.

The additional return earned for accepting risk is called the:

risk premium

Which one of the following had the greatest volatility of returns for the period 1926-2009?

small-company stocks

Which one of the following had the highest average return for the period 1926-2006?

small-company stocks

Which one of the following had the highest risk premium for the period 1926-2009?

small-company stocks

The risk-free rate is:

the rate of return on a riskless investment.