Finance quiz
Standard deviation measures _____ risk.
total
The information content of a regular dividend increase generally signals that:
management believes the future earnings of the firm will be strong.
A _____ is an alternative method to cash dividends that is used to distribute a firm's earnings to shareholders.
share repurchase
A stock has a beta of 1.22, the expected return on the market is 12 percent, and the risk-free rate is 4 percent. What must the expected return on this stock be?
13.76 E(Ri) = .040 + (.12 − .040)(1.22) E(Ri) = .1376, or 13.76%
The annual returns for KLO stock for the last three years are 11.2 percent, 16.4 percent and 3.8 percent. Assuming no dividends were paid, what was the 3-year holding period return?
34.36% HPR = (1.112 × 1.164 × 1.038) - 1 = .3436, or 34.36%
A stock has had returns of 17.92 percent, 12.44 percent, 6.56 percent, 28.30 percent, and −14.09 percent over the past five years, respectively. What was the holding period return for the stock?
55.73 5-year holding-period return = [(1 + .1792)(1 + .1244)(1 + .0656)(1 + .2830)(1 − .1409)] − 1 5-year holding-period return = .5573, or 55.73%
What are the arithmetic and geometric average returns for a stock with annual returns of 11 percent, 14 percent, -2 percent and 6 percent?
7.25%; 7.08% Arithmetic average = (.11 + .14 - .02 + .06)/4 = .0725, or 7.25%Geometric return = (1.11 × 1.14 × .98 × 1.06).25 - 1 = .0708, or 7.08%
A portfolio consists of $10,500 of Stock A, $21,600 of Stock B, and $27,000 of Stock C. The expected returns on Stocks A, B, and C are 7 percent, 11 percent and 5 percent, respectively. What is the overall portfolio expected rate of return?
7.55% Portfolio value = $10,500 + 21,600 + 27,000 = $59,100E(r) = ($10,500/$59,100 × .07) + ($21,600/$59,100 × .11) + ($27,000/$59,100 × .05) = .0755, or 7.55%
A stock has had returns of 13 percent, 31 percent, 18 percent, −19 percent, 31 percent, and −7 percent over the last six years. What are the arithmetic and geometric returns for the stock?
Arithmetic return 11.17 ± 1% % Geometric return 9.50 ± 1% %
How frequently do dividend-paying firms in the U.S. generally pay regular cash dividends?
Quarterly
The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
Risk premium
What are the portfolio weights for a portfolio that has 150 shares of Stock A that sell for $40 per share and 115 shares of Stock B that sell for $25 per share?
Stock A .6761 ± 1% Stock B .3239 ± 1%
Over the long-term, which one of the following is a correct statement concerning risk premium?
Stocks tend to have a higher risk premium than bonds.
Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2012?
U.S. Treasury bills
The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:
clientele effect.
The indifference policy advocates that
dividend policy is irrelevant.
The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the _____ date.
ex-dividend
From a tax-paying shareholder's point of view, a stock repurchase:
is more desirable than a cash dividend.
The principle of diversification tells us that:
spreading an investment across many diverse assets will lower a portfolio's level of risk.
A payment made by a firm to its owners in the form of new shares of stock is called a _____ dividend.
stock
Lisa purchased 100 shares of ABC stock on May 15th. On May 21st, she purchased another 100 shares and then on May 22nd she purchased 200 additional shares. The company declared a dividend of $1.32 a share on May 5th to holders of record on Friday, May 23rd. The dividend is payable on May 31st. How much dividend income will she receive on May 31st from ABC?
$132 Dividend received = $1.32 × 100 = $132
This morning you purchased one share of stock for $14. The stock pays $.20 per share each quarter as a dividend. What must the stock price be one year from now if you want to earn a total return of 12 percent for the year?
$14.88 Total return = .12 = [Pt + 1 - $14 + (4 × $.20)]/$14Pt + 1 = $14.88
The variance of Stock A is .003969, the variance of Stock B is .007056, and the covariance between the two is .0026. What is the correlation coefficient?
.4913
A portfolio is comprised of 30 percent of stock X, 55 percent of stock Y, and 15 percent of stock Z. Stock X has a beta of .87, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the portfolio beta?
1.231 BetaPortfolio = (.30 × .87) + (.55 × 1.48) + (.15 × 1.04) = 1.231
Suppose a stock had an initial price of $80 per share, paid a dividend of $.60 per share during the year, and had an ending share price of $88. Compute the percentage total return.
10.75
How can management best signal the market that a firm is doing well?
Increase the regular dividend amount
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?
Less than .5 percent
BBG stock has a beta of .86 and an expected return of 9.51 percent. The risk-free rate of return is 3.26 percent and the market rate of return is 11.14 percent. Which one of the following statements is true given this information?
The return on BBG stock will graph below the security market line.
Consider the following information on Stocks I and II: Rate of Return if State Occurs State ofProbability of EconomyState of EconomyStock IStock II Recession .30 .10 −.25 Normal .40 .17 .12 Irrational exuberance .30 .11 .45 The market risk premium is 8 percent, and the risk-free rate is 3 percent.
The standard deviation on Stock I's expected return is 3.21 ± 1% percent, and the Stock I beta is 1.26 ± 1% . The standard deviation on Stock II's expected return is 27.13 ± 1% percent, and the Stock II beta is 0.98 ± 1% . Therefore, Stock I is "riskier".
