Investments Final

A stock sold for $25 at the beginning of the year. The end of year stock price was $25.50. What is the amount of the annual dividend if the total return of the year was 8.5 percent?

$1.63 {Selling price- Purchasing price+ (Total Dividends/shares)}/purchasing price ($25.50 - 25 + D)/25=.085

An asset had annual returns of 13, 10, -14, 3, and 36 percent, respectively, for the past five years. What is the standard deviation of these returns?

18.09% [Mean = (.13+.10- .14+.03+ .36)/5 = .096 --> Var = [(.14 - .096)2 + (.11 - .096)2 + (-.15 - .096)2 + (.02 - .096)2 + (.37 - 096)2]/(5 - 1) = .03577 --> Std Dev = (.) = 18.09 percent]

You purchased a stock for 30.43 a share, received a dividend of $.70 per share, and sold the stock after one year for $30.22 a share. What was your dividend yield on this investment

2.30% $.70/30.43

The average risk premium on long-term corporate bonds for the period 1926-2018 was

2.9%

Over the past ten years, large-company stocks have returned an average of 8.7 percent annually, long-term corporate bonds have earned 4.1 percent annually, and U.S. Treasury bills have returned 2.5 percent annually. How much additional risk premium would you have earned if you had invested in large-company stocks rather than long-term corporate bonds over those ten years?

4.6% Additional risk premium= (.087-.025) - (.041 - .025)= .0460

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

68

Malkiel's Theorem

Bond prices and bond yields move in opposite directions.

Limit Order

Buy and sell at best price available but not more or less than then the limit price.

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

Capital gain or loss plus any dividend income.

Bid Price

Price dealers receive from investors

STRIPS

Pure discount instruments created by "stripping" the coupons and principle payments of U.S. Treasury Notes.

Jeremy owns a stock that historically returned 7.5 annually with a standard deviation of 10.2 percent. There is only a .5 percent chance that the stock will produce a return greater than _________ percent in any one year.

Return= 7.5% + 3(10.2= 38.1

Systematic Risk

Risk that influences a large number of assets. Also called market risk. Cannon be diversified away

Which one of the following had the greatest volatility of returns for the period 1926-2018?

Small-company stocks

Which one of the following had the highest average return for the period 1926-2018

Small-company stocks

Jensen's Alpha

The excess return above or below the security market line. It can be interpreted as a measure of by how much the portfolio "beat the market." Rp-[Rf+(E(Rm)-Rf)]XBp

Which one of the following statements is correct based on the historical returns for the period 1926-2018?

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

Dirty Price

The price the buyer actually pays. Accrued interest + clean price

Which one of the following statements is correct?

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

Clean Price

The stated price where accrued interest is ignored, also called the flat price

Correlation

The tendency of the returns on two assets to move together. Positively correlated assets tend to move up.

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 had the narrowest bell curve for the period 1926-2018

U.S. Treasury bills

Capital gains are included in the return on an investment:

Whether or not the investment is sold

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 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

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

percentage return

STRIPS Price

Face Value/(1+(YTM/2)^2M)

Ask Price

The price dealers receive from investors

Current yield

Annual coupon/Bond price

Coupon Rate

Annual coupon/Par Value

Todd purchased 600 shares of stock at a price of $68.20 a share and received a dividend of $1.42 per share. After six months, he resold the stock for $71.30 a share. What was his total dollar return?

$2,712 600 x (71.30 + 68.20 + 1.42)

12. You have been researching a company and have estimated that the firm's stock will sell for $44 a share one year from now. You also estimate the stock will have a dividend yield of 2.18 percent. How much are you willing to pay per share today to purchase this stock if you desire a total return of 15 percent on your investment?

$39 [($44 − X) / X] +.0218= 15

You purchased a stock for $50.00 a share and resold it one year later. Your total return for the year was 11.5 and the dividend yield was 2.8 percent. At what price did you resell the stock?

$54.35 Capital gains yield = 11.5% - 2.8%= 8.7% $50x(1+.087)= $54.35

An asset has an average annual historical return of 11.6 percent and a standard deviation of 17.8 percent. What range of returns would you expect to see 95 percent of the time?

-24% to +47.2% Range= 11.6 (+ or -) 2(17.8)

Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, he received a dividend of $0.22 a share and also sold the shares for $42 each. What was his annualized rate of return on this investment?

-31.95 HPR= ($42-$48+$.22)/$48= -0.120417 1 + EAR = (1 + -0.120417)12/4-1 = -31.95 percent

A stock has an average historical return of 10.7 percent and a standard deviation of 19.3 percent. Which range of returns would you expect to approximately two-thirds percent of the time?

-8.6 to + 30

Based on the period 1926-2018, the risk premium for U.S. Treasury bills was:

0%

An asset had annual returns of 12,18,6,-9, and 5 percent, respectively, for the last five years. What is the variance of these returns?

0.1013 Mean= (.12 + .18 + .06 -.09 + .05)/5= 0.64 [(.12-.064)^2 + (.18-.064)^2 + (.06-.064)^2 + (-.09-.064)^2 + (.05-.064)^2]/(5 - 1) = .01013]

3 Types of risk for bond-holders

1. Default risk2. Credit risk3. Interest risk

Tom decides to begin investing some portion of his annual bonus, beginning this year with $6,000. in the first year he earns a 8% return and adds $3,000 to his investment. in the second his portfolio loses 4% but, sticking to his plan, he adds $1,000 to his portfolio. in this year his portfolio returns 2%. what is tom's dollar-weighted average return on his investments?

1.20% CF0 = -6,000 CF1 = -3,000 CF2 = -1,000 So CF3 = ((((6,000*1.08)+3,000)*0.96)+1000)*1.02= 10,302.82 Solve for IRR

You invested 6,000 six years ago. The arithmetic average return on your investment is 9.3 percent and the geometric average return is 9.57 percent. What is the value of your portfolio today?

10,382

Big Town Markets common stock returned 14.3, 12.5, 9.9, 6.5, and 11.1 percent, respectively, over the past five years. What is the arithmetic average return?

10.86% Return- (.143+.125+.099+.065+.111)/5= .1086

Ellen just sold a stock and realized a 7.5 percent return for a 7-month holding period. What was her annualized rate or return?

13.30% 1 + EAR = (1 + 0.075)12 / 7 - 1 = 13.30 percent

Shane purchased a stock this morning at a cost of $13 a share. He expects to receive an annual dividend of $.27 a share next year. What will the price of the stock have to be one year from today if Shane is to earn a 8 percent rate of return on this investment?

13.77 {X-13+0.27}/13= .08

One year ago, you purchased 500 shares of stock at a cost of $10,500. The stock paid an annual dividend of $1.10 per share. Today, you sold those shares for 23.90 each. What is the capital gains yield on this investment?

13.81% (P1 - P0) / P0

Based on the period 1926-2018, the risk premium for small-company stocks averaged:

13.9%

Jimmy purchased a stock for 22.22 a share, received a dividend of $.55a share, and sold the stock after one year for 25.36 a share. What was his dividend yield on this investment?

2.48 .55/22.22=.0248

You purchased a stock eight months ago for $36 a share. Today, you sold that stock for $41.50 a share. The stock pays no dividends. What was your annualized rate of return?

23.77% HPR = (41.50 - $36) / $36= 0.1528 1 + EAR = (1 + 0.1528)12 / 8 - 1 = 23.77 percent

Joanne invested $15,000 six years ago. Her arithmetic average return on this investment is 8.72 percent, and her geometric average return is 8.50 percent. What is Joanne's portfolio worth today?

24,472 8.5% 108.5% 108.5% ^ 6 years = 1.6315 $15,000 x 1.6315 = $24,472

Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before reselling it.

3.00

One year ago, you purchased 200 shares of Southern Foods common stock for 39.50 a share. Today, you sold your shares for 35.40 a share. During this past year, the stock paid $1.36 in dividends per share. What is your dividend yield on this investment?

3.443% Annual dividends per share/current share price 1.36/39.50

Celsius stock had year-end prices of $42, $37, $44, and $46 over the past four years, respectively. What is the arithmetic average rate of return?

3.85% Annual returns are: (37-42)/42= -.119048; (44-37)/37= .189189 ; (46-44)/44= .045455 Average= (-.119048 + .189189 + .045455)/3= .0385

You own a stock that has produced an arithmetic average return of 8.6 percent over the past five years. The annual returns for the first four years were 16, 11, -19, and 3 percent, respectively. What was the rate of return on the stock in year five?

32% Total return= .086 x 5= .43 Year 5 return= .43 - (.16 + .11 -0.19 + .03= .32

You purchased a stock for 35 a share and resold it one year later. Your total return for that year was 7.5 percent and the dividend yield was 1.4 percent. At what price did you resell the stock

37.14 Capital gains yield= 7.5-1.4= 6.1 35x(1+.061)=

Stacey purchased 300 shares of Coulter Industries stock and held it for 3 months before reselling it. What is the value of "m" when computing the annualized return on this investment?

4.00

Over the past four years, Jellystone Quarry produced returns of 12.5, 15.1, 8.7, and 2.9 percent, respectively. For the same time period, the risk-free rate 4.7, 5.3, 3.9, and 3.4 percent each year, respectively. What is the arithmetic average risk premium on this stock during these four years?

5.40% {(.125-.047)+(.151-.053)+(.087-.039)+(.026-.034)} /4

A portfolio had an original value of 7,400 seven years ago. The current value of the portfolio is $11,898. What is the average geometric return on this portfolio?

7.02 $7,400 (1+R)^7= 11,898

Blackstone Mines stock returned 10.5, 17.2, -9, and 14.5 percent over the past four years, respectively. What is the geometric average return?

7.78 [(1+.105)x(1+.172)x (1-.09)x(1+.145)]^1/4 - 1

An initial investment of 40,000 fifty years ago is worth 1,822,222 today. What is the geometric average return on this investment

7.94% N=50 PV= -$40,000 PMT= 0 FV= 1,822,222 I/Y= CPT

The average risk premium on large-company stocks for the period 1926-2018 was:

8.3%

A stock has an average historical risk premium of 6.1 percent. The expected risk-free rate for next year is 2.2 percent. What is the expected rate of return on this stock for next year?

8.30% Expected return = 6.1% + 2.2%= 8.3%

The geometric return on a stock over the past 10 years was 7.9 percent. The arithmetic return over the same period was 8.8 percent. What is the best estimate of the average return on this stock over the next 5 years?

8.40 Projected return= {[(5-1)/(10-1)x.0790} + {[(10-5)/10-1)]x.0880= .0840

Last year, ABC returned 12.6 percent, the risk-free rate was 4.0 percent, and the inflation rate was 2.5 percent. What was the risk premium on ABC stock.

8.60% Risk premium= 12.60% - 4.00% = 8.60%

Christine owns a stock that dropped in price from $43.57 to $39.49 over the past year. The dividend yield on that stock is 1.6 percent. What is her total return on this investment for the year?

8.73 [($39.49 − $43.57) / $43.57] +.016

One year ago, you purchased 400 shares of Southern Cotton at $36.20 a share. During the past year, you received a total of $250 in dividends. Today, you sold your shares for $38.50 a share. What is your total return on this investment?

8.80 {Selling price- Purchasing price+ (Total Dividends/shares)}/purchasing price

Treasury Yield Curve

A plot of treasury yields against maturities. Represents the interest rates for default-free lending across the maturity spectrum.

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

A risky asset minus the risk-free rate

growth stocks

A term often used to describe high-P/E stocks.

value stocks

A term often used to describe low-P/E stocks.

An annualized return:

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

The geometric mean return on large-company stocks for the 1926-2018 period:

is less than the arithmetic mean return

price-earnings (P/E) ratio

Current stock price divided by annual earnings per share (EPS).

price-sales (P/S) ratio

Current stock price divided by annual sales per share.

price-cash flow (P/CF)

Current stock price divided by current cash flow per share.

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

Dollar-weighted average return

Macaulay's Duration

Duration is the measurement of time it takes to get one's money back.

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

Effective annual return

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

Effective annual return

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

Geometric average return

Callable Bond

Gives the issuer the option to buy back the bond at a specified call price after an initial call protection period.

DIJA

Index of stock prices of 30 large companies of American Industry

Unsystematic risk

Influences a single company or a small group of companies. Measured by Beta. Can be eliminated by diversification.

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

Initial stock price

earnings yield (E/P)

Inverse of the P/E ratio: earnings per share divided by price per share.

Sharpe Ratio

Is a reward-to-risk ratio that focuses on total risk. Uses standard deviation in the denominator and standard deviation is the measurement of total risk. (Rp-Rf)/Op(standard deviation)

Which one of the following had the smallest standard deviation of returns for the period 1926-2018?

Long-term corporate bonds

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

Market capitalization

price-book (P/B) ratio

Market value of a company's common stock divided by its book (or accounting) value of equity.

Treynor Ratio

Measures systematic risk because beta is in the denominator. (Rp-Rf).Bp

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

Normal distribution

Prime Rate

The basic interest rate on short-term loans that commercial banks charge to their most credit worthy corporate customers

Discount Rate

The interest rate that the Fed offers to commercial banks for overnight reserve loans.

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

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

minus half the variance

Blume's formula is used to:

predict future rates of return

The additional return earned for accepting risk is called the:

risk premium

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

risk-free rate.

Which one of the following had the highest risk premium for the period 1926-2018

small-company stocks

The capital gains yield is equal to:

the percentage price appreciation on an investment. the rise in the stock price divided by the original price of the security.

The risk-free rate is:

the rate of return on a riskless investment

The arithmetic average return is the:

the return earned in an average year over a multi-year period

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 1926-2018, 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

The the period 1926-2018, the annual return on large-company stocks.

was unpredictable based on prior year's performance