FIN 302: Quiz 2

Annual percentage rates can be converted to effective annual rates by means of the following formula (n=#of compounding periods): A. [1 + (APR/n)]n - 1 B. (APR)(n) C. (APR/n) D. (periodic rate)(n)

A. [1 + (APR/n)]n - 1

The risk premium is defined as the rate of return on: A. a risky asset minus the risk-free rate. B. the overall market. C. a U.S. Treasury bill. D. a risky asset minus the inflation rate. E. a riskless investment.

A. a risky asset minus the risk-free rate.

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. A. higher; higher B. higher; lower C. lower; higher D. lower; lower E. The distribution of returns does not affect the expected average rate of return.

A. higher; higher

Which one of the following statements is correct concerning the dividend yield and the total return? A). The dividend yield can be zero while the total return must be a positive value. B). The total return can be negative but the dividend yield cannot be negative. C). The total return must be greater than the dividend yield. D). The total return plus the capital gains yield is equal to the dividend yield. E.) The dividend yield exceeds the total return when a stock increases in value.

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

Which one of the following statements is correct based on the historical returns for the period 1926- 2009? A. For the period, Treasury bills yielded a higher rate of return than long-term government bonds. B. The inflation rate exceeded the rate of return on Treasury bills during some years. C. Small-company stocks outperformed large-company stocks every year during the period. D. Bond prices, in general, were more volatile than stock prices. E. For the period, large-company stocks outperformed small-company stocks

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

The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the: A. risk premium. B. deflated rate of return. C. risk-free rate. D. expected rate of return. E. market rate of return.

C. risk-free rate.

When the total return on an investment is expressed on a per-year basis it is called the: A. capital gains yield. B. dividend yield. C. holding period return. D. effective annual return. E. initial return.

D. effective annual 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: A. decrease the investment in stocks and increase the investment in bonds. B. replace the corporate bonds with intermediate-term government bonds. C. replace the corporate bonds with Treasury bills. D. increase the standard deviation of the portfolio. E. reduce the expected volatility of the portfolio.

D. increase the standard deviation of the portfolio.

Which one of the following had the highest average return for the period 1926-2009: A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

D. small-company stocks

Which one of the following should be used to compare the overall performance of three different investments? A. holding period dollar return B. capital gains yield C. dividend yield D. holding period percentage return E. effective annual return

E. effective annual return

The holding-period return (HPR) for a stock is equal to: A. the real yield minus the inflation rate. B. the nominal yield minus the real yield. C. the capital gains yield minus the tax rate. D. the capital gains yield minus the dividend yield. E. the dividend yield plus the capital gains yield.

E. the dividend yield plus the capital gains yield.