Chapter 11

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00? A. -2.50% B. -0.39% C. -0.04% D. -2.56%

-2.50%

The Dow Jones Industrial Average is: A. the most representative of the stock market indexes. B. an index of 500 largest corporate stocks in America. C. an index of 30 major industrial stocks. D. an equally weighted index of all stocks traded on the New York Stock Exchange.

an index of 30 major industrial stocks.

Although Standard and Poor's Composite Index contains a limited number of U.S. publicly traded stocks, the Index represents: A. all stocks in the industrial sector. B. all stocks priced at $50 a share or more. C. approximately 50% of U.S. stocks traded, in market value. D. approximately 75% of U.S. stocks traded, in market value.

approximately 75% of U.S. stocks traded, in market value.

When the annual rate of return on U.S. Treasury bills is historically high, investors expect the risk premium on the stock market to be: A. considerably lower than normal. B. considerably higher than normal. C. approximately normal. D. approximately equal to zero.

approximately normal.

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that: A. vary directly with the rest of the portfolio. B. vary proportionally with the rest of the portfolio. C. are less than perfectly correlated with the rest of the portfolio. D. are perfectly correlated with the market portfolio.

are less than perfectly correlated with the rest of the portfolio.

One common reason for reporting standard deviations rather than variances is that standard deviations: A. are lower. B. are stated in understandable units. C. account properly for negative returns. D. take probability estimates into consideration.

are stated in understandable units.

By reviewing the historical performance of the stock market, we can: A. accurately project future performance. B. be assured of a positive return over any 3-year period. C. ascertain that losses will occur but cannot predict when or how large. D. be assured we will not lose more than one-third of our investment in any given year.

ascertain that losses will occur but cannot predict when or how large.

The variance of a stock's returns can be calculated as the: A. average value of deviations from the mean. B. average value of squared deviations from the mean. C. square root of the average value of deviations from the mean. D. sum of the deviations from the mean.

average value of squared deviations from the mean.

The idea that investors in a common stock may expect a lower total return if they purchase a stock with limited price volatility rather than one with high price volatility suggests that: A. investors are irrational. B. there is a relationship between risk and return. C. real rates of return will be lower during periods of price stability. D. stocks should be avoided when inflation is low.

there is a relationship between risk and return.

The higher the standard deviation of a stock's annual returns, the: A. lower the level of unique risk. B. lower the expected rate of return. C. higher the accuracy of predictions of the stock's return for any given year. D. wider the dispersion of those returns over time.

wider the dispersion of those returns over time.

Although several stock indexes are available to inform investors of market changes, the Dow Jones Industrial Average: A. is the broadest-based of the market indexes. B. is the only reliable market index. C. accounts for approximately 70% of U.S. market value. D. is the best-known of the U.S. market indexes.

is the best-known of the U.S. market indexes.

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life. If the investor sells now he or she is likely to realize a total return that is: A. greater than 6%. B. less than 6%. C. equal to 2%. D. equal to 6%.

less than 6%.

The incremental risk to a portfolio from adding another stock: A. is always greater than the average portfolio risk. B. is always less than the average portfolio risk. C. is always positive. D. may be either positive or negative.

may be either positive or negative.

The actual real rate of return on an investment will be positive as long as the: A. nominal return is positive. B. inflation rate is positive. C. nominal return exceeds the inflation rate. D. inflation rate exceeds the real return.

nominal return exceeds the inflation rate.

A firm is said to be countercyclical if its returns: A. continue to decrease, year after year. B. continue to increase, year after year. C. outperform when most stocks do poorly. D. are negative in real terms.

outperform when most stocks do poorly.

The appropriate opportunity cost of capital is the return that investors give up on alternative investments that: A. possess the same level of risk. B. earn the risk-free rate of return. C. are included in the S&P 500 index. D. earn the average market rate of return.

possess the same level of risk.

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on: A. Treasury bills. B. the market portfolio. C. the market portfolio minus the rate of return on Treasury bills. D. Treasury bonds plus a maturity premium.

the market portfolio.

A maturity premium is offered on long-term Treasury bonds due to: A. the risk of changing interest rates. B. the risk of default. C. their unique risk. D. the uncertainty of their maturity date.

the risk of changing interest rates.

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks? A. The individual stock's standard deviation will be lower. B. The individual stock's standard deviation will be higher. C. The standard deviations should be equal. D. There is no way to predict this relationship.

The individual stock's standard deviation will be higher.

Which one of the following risks would be classified as a unique risk for an auto manufacturer? A. Interest rates B. Steel prices C. Business cycles D. Foreign exchange rates

Steel prices

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain. How much was received in dividend income during the year? A. $2.00 B. $2.20 C. $4.00 D. $4.40

$4.00

Assume when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents. How much would you expect to gain after 20 tosses? A. $5.00 B. $7.50 C. $10.00 D. $15.00

$5.00

A share of stock currently sells for $60, pays an annual dividend of $4.00, and earned a rate of return of 20% over the past year. What did this stock sell for one year ago? A. $42.00 B. $46.15 C. $48.46 D. $53.33

$53.33

Over a 20-year period an investment of $1,000 in common stocks returned an average of 11% in nominal terms and 4% in real terms. At the end of the 20 years, the portfolio value was: A. $1,800 in real terms. B. $3,679.19 in real terms. C. $7,870.59 in nominal terms. D. $8,062.31 in nominal terms.

$8,062.31 in nominal terms.

A common stock was held for 2 years during which time total dividends of $20 were paid. The stock was sold for $100. What was the purchase price of the stock if the total rate of return for the period was 32%? A. $61.60 B. $64.80 C. $88.00 D. $90.91

$90.91

What is the percentage return on a stock that was purchased for $48.40, paid a $1.67 dividend, and was then sold after one year for $46.20? A. -2.50% B. -1.10% C. 0.23% D. -0.33%

-1.10%

What real rate of return is earned by a one-year investor in a bond that was purchased for $1,000, has a coupon rate of 8%, and was sold for $960 when the inflation rate was 6%? A. -1.89% B. 1.92% C. -2.66% D. 2.47%

-1.89%

What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share one year later for $28.50? A. -5% B. 0% C. 5% D. 10%

0%

What is the approximate standard deviation of returns for a one-year project that is equally likely to return 100% as it is to provide a 100% loss? A. 0% B. 50% C. 71% D. 100%

100%

A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. The economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock? A. 11.98% B. 12.06% C. 11.10% D. 11.23%

11.10%

Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What nominal rate of return did she earn? A. 11.16% B. 14.23% C. 12.09% D. 10.55%

11.16%

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8%, -12%, -12%, and 15%? A. 9.26% B. 10.26% C. 11.26% D. 12.01%

12.01%

What is the variance of returns of a 3-stock portfolio (with unequal weights 25%, 50%, and 25%) that produced returns of 20%, 25%, and 30%, respectively? A. 10.00 B. 12.50 C. 15.00 D. 20.00

12.50

What is the standard deviation of a portfolio's returns if the mean return is 15%, the variance of returns is 184, and there are three stocks in the portfolio? A. 7.83% B. 13.56% C. 41.00% D. 225.00%

13.56%

What is the approximate variance of returns if over the past 3 years an investment returned 8%, -12%, and 15%? A. 31 B. 131 C. 182 D. 961

131

From a historical perspective (1900-2013), what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5%? A. 14.3% B. 12.3% C. 15.1% D. 16.5%

15.1%

What is the variance of returns of a 3-stock portfolio (each stock being equally weighted) that produced returns of 20%, 25%, and 30%? A. 16.67 B. 33.33 C. 50.00 D. 100.00

16.67

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains approximately _____ stocks. A. 2 B. 5 C. 20 D. 50

20

A project's expected return is 15%, which represents a 35% return in a booming economy and a 5% return in a stagnant economy. What is the probability of a booming economy occurring if these are the only two economic states? A. 18.33% B. 25.00% C. 33.33% D. 50.00%

33.33%

What is the standard deviation of returns of a 4-stock portfolio (each stock being equally weighted) that produced returns of 20%, 20%, 25%, and 30%? A. 2.15% B. 3.15% C. 4.15% D. 5.15%

4.15%

What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%? A. 0.96% B. 5.96% C. 6.05% D. 5.47%

6.05%

If a share of stock provided a 14.84% nominal rate of return over the previous year while the real rate of return was 6.65%, then the inflation rate was: A. 8.89%. B. 7.68%. C. 8.03%. D. 9.12%.

7.68%.

A portfolio is comprised of 60% of Stock A and 40% of Stock B. What is the expected return of the portfolio? A. 7.7% B. 8.3% C. 9.1% D. 6.4%

7.7%

What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and will increase by 23% during boom times if each scenario has an equal likelihood of occurrence? A. 8.67% B. 13.00% C. 13.43% D. 17.33%

8.67%

If the standard deviation of a portfolio's returns is known to be 30%, then its variance is: A. 5.48%. B. 5.48% squared. C. 900.00%. D. 900.00% squared.

900.00% squared.

Which statement is correct concerning macro risk exposure? A. All firms face equal macro risk exposure. B. Only portfolios of stocks face macro risk exposure. C. Macro risk exposure affects the cost of capital. D. Macro risk exposure is less important to diversified investors than micro risk exposure.

Macro risk exposure affects the cost of capital.

Which one of the following risks is most important to a well-diversified investor in common stocks? A. Market risk B. Unique risk C. Unsystematic risk D. Diversifiable risk

Market risk

How is it possible for real rates of return to increase during times when the rate of inflation increases? A. Inflation increased more than the real return. B. Nominal returns actually decreased. C. Nominal returns increased more than inflation. D. Nominal returns increased less than inflation.

Nominal returns increased more than inflation.

Which one of the following statements seems most appropriate when the Dow Jones Industrial Average increases by 2%? A. All stocks on the exchange increased by 2%. B. All 30 DJIA stocks increased by 2%. C. One market indicator was up by 2%. D. The S&P 500 index increased by 2%.

One market indicator was up by 2%.

In a year in which common stocks offered an average return of 18%, Treasury bonds offered 10%, and Treasury bills offered 7%. The risk premium for common stocks was: A. 1%. B. 3%. C. 8%. D. 11%.

11%.

Stock A has 10 million shares outstanding and stock B has 5 million shares outstanding. Both stocks sell for $10 a share. What is their relative weighting if both stocks are represented in the S&P 500? A. They have equal weighting, like all S&P 500 stocks. B. B has twice the weighting, to account for having fewer shares. C. A has twice the weighting, to account for having more shares. D. They are weighted according to their expected performance.

A has twice the weighting, to account for having more shares.

Which one of the following companies is most apt to be exposed to the least amount of macro risk? A. A large producer of flour B. A regional airline C. A major commercial bank D. A machine tool manufacturer

A large producer of flour

A stock investor owns a diversified portfolio of 15 stocks. What will be the most likely effect on the portfolio's standard deviation if one more stock is added? A. A slight increase will occur. B. A large increase will occur. C. A slight decrease will occur. D. A large decrease will occur.

A slight decrease will occur.

Which one of the following security classes has the highest standard deviation of returns? A. Common stocks B. Long-term Treasury bonds C. Treasury bills D. Corporate bonds

Common stocks

Which one of the following concerns is likely to be most important to portfolio investors seeking diversification? A. Total volatility of individual securities B. Standard deviation of individual securities C. Correlation of returns between securities D. Achieving the risk-free rate of return

Correlation of returns between securities

Which one of the following firms is likely to exhibit the least macro risk exposure? A. Furniture manufacturer B. Airline company C. Dog food processor D. Auto manufacturer

Dog food processor

Which one of the following guarantees is offered to common stock investors? A. Guarantee to receive dividends B. Guarantee to receive capital gains C. Guarantee only to receive a refund of principal D. No guarantees of any form

No guarantees of any form

Which one of the following statements is incorrect concerning stock indexes? A. Indexes have been developed for foreign stocks. B. Some indexes cover only a specific market sector. C. Most indexes include all of the publicly-traded common stocks. D. Some indexes are equally weighted.

Most indexes include all of the publicly-traded common stocks.

Which one of these is a specific risk? A. Revision to the corporate tax laws B. Inflation increase of 2.3% C. Reduction in the overall economic output D. Retirement of a company executive

Retirement of a company executive

In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk? A. Stocks with returns that are positively correlated B. Stocks with returns that are negatively correlated C. Stocks with returns that are not correlated D. Stocks that have the highest expected returns

Stocks with returns that are negatively correlated

Which one of these is considered to be the safest investment? A. U.S. Treasury bonds B. Common stock C. U.S. Treasury bill D. Preferred stock

U.S. Treasury bill

Which one of the following risk types can be most eliminated by adding stocks to a portfolio? A. Systematic risk B. Unique risk C. Market risk D. Inflation rate risk

Unique risk

Which one of the following would you expect to represent the broadest-based index of U.S. stocks? A. Wilshire 5000 B. Dow Jones Industrial Average C. Standard and Poor's Composite D. Financial Times Index

Wilshire 5000

Industries that generally perform well when other industries are performing well are referred to as: A. diversified industries. B. cyclical industries. C. risk-free industries. D. systematic-risk industries.

cyclical industries.

When high growth is expected in the economy, an investor should receive higher returns from: A. cyclical investments. B. countercyclical investments. C. stocks with negative correlations. D. stocks with low standard deviations.

cyclical investments.

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks: A. offer higher returns. B. have more systematic risk. C. have no diversification of risk. D. do not have unique risk.

have no diversification of risk.

Real rates of return are typically less than nominal rates of return due to: A. inflation. B. capital gains. C. dividend payments. D. depreciation.

inflation

The major benefit of diversification is the: A. increased expected return. B. removal of all negative risk assets from the portfolio. C. reduction in the portfolio's systematic risk. D. reduction in the portfolio's total risk.

reduction in the portfolio's total risk.

"Dow up 14. Story at 6:00." This means that: A. the Dow was up 14% during today's trading. B. 14 of the Dow's 30 stocks increased in price today. C. a share of Dow stock went up by $14 today. D. the Dow index increased by 14 points in today's trading.

the Dow index increased by 14 points in today's trading.

The variance of an investment's returns is a measure of the: A. volatility of the rates of return. B. probability of a negative return. C. historic return over long time periods. D. average value of the investment.

volatility of the rates of return.

Historically, periods of market declines: A. have been limited to losses of 38% or less of market value. B. have affected all stocks to the same degree. C. have been limited to periods of one year or less in duration. D. can be sudden and severe.

can be sudden and severe.

If a stock's returns are volatile, then the stock: A. cannot be considered a negative risk asset. B. can still be considered a negative risk asset. C. has macro risk, but no unique risk. D. does not offer diversification potential.

can still be considered a negative risk asset.

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that: A. the variance of Treasury bill returns is zero. B. the standard deviation of Treasury bill returns is negative. C. the real return on Treasury bills has been negative. D. common stocks should offer a higher return than Treasury bills.

common stocks should offer a higher return than Treasury bills.

When viewing the long-term trend of the price volatility of U.S. stocks, it is readily apparent that volatility has: A. continually increased. B. continually decreased. C. increased and decreased but has no specific pattern. D. remained constant for years.

increased and decreased but has no specific pattern.

Investment risk can best be described as the: A. dispersion of possible returns. B. elimination of macro risk through diversification. C. possibility of changes in the cost of capital. D. level of systematic risk for an undiversified investor.

dispersion of possible returns.

Risk factors that are expected to affect only a specific firm are referred to as: A. market risk. B. diversifiable risk. C. systematic risk. D. risk premiums.

diversifiable risk.

Averaging the deviations from the mean for a portfolio of securities will: A. compute the standard deviation. B. compute the variance. C. equal zero. D. equal the number of securities in the portfolio.

equal zero.

Although unique risk is present in differing amounts, individual stocks are: A. exposed to the same amount of market risk. B. exposed to differing amounts of market risk also. C. not exposed to market risk; only the general economy is subject to market risk. D. able to diversify away their market risk.

exposed to differing amounts of market risk also.

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to their: A. greater default risk. B. higher level of unique risk. C. greater exposure to interest rate risk. D. illiquidity.

greater exposure to interest rate risk.

The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that the bills: A. do not have default risk. B. have more price volatility. C. have a shorter maturity at time of issue. D. offer a higher return.

have a shorter maturity at time of issue.

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that: A. have only unique risks. B. have diversified away the macro risk. C. have low exposure to business cycles. D. pay guaranteed dividends.

have low exposure to business cycles.

The wider the dispersion of returns on a stock, the: A. lower the expected rate of return. B. higher the standard deviation. C. lower the real rate of return. D. lower the variance.

higher the standard deviation.