FIN 5243 - HW 3

Suppose a stock had an initial price of $54 per share, paid a dividend of $1.30 per share during the year, and had an ending share price of $64. Compute the percentage total return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

20.93%

Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Year ~ Large-Company stocks ~ US Treasury bills 1 3.98% 6.62% 2 14.17 4.44 3 19.31 4.31 4 −14.37 7.33 5 −31.86 5.36 6 37.02 6.23 a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period. b.Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. c-1.Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? c-2.Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period?

A. Large Company Stocks - 4.71% US Treasury Bills - 5.72% B. Large Company Stocks - 24.69% US Treasury Bills - 1.22% C-1. -1.01% C-2. 25%

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments.

A stock has had returns of 15 percent, 22 percent, 15 percent, −10 percent, 29 percent, and −5 percent over the last six years. What are the arithmetic and geometric average returns for the stock?

Arithmetic Average: 11% Geometric Average Return:10.08%

Which of the following statements is true based on the historical record for 1926-2019?

Bonds are generally a safer, or less risky, investment than are stocks.

Suppose a stock had an initial price of $84 per share, paid a dividend of $1.50 per share during the year, and had an ending share price of $92. What was the dividend yield and the capital gains yield?

Dividend Yield: 1.79% Capital Gain Yield: 9.52%

Which one of the following statements correctly applies to the period 1926-2019?

Long-term corporate bonds outperformed long-term government bonds.

Which one of the following statements is correct based on the historical record for the period 1926-2019?

Long-term government bonds had a lower return but a higher standard deviation, on average, than did long-term corporate bonds.

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2019? Rank from highest to lowest.

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following categories of securities had the highest average annual return for the period 1926-2019?

Small-company stocks

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2019?

Small-company stocks

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

The information was expected.

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019?

U.S. Treasury bills

Year Returns X Y 1 16% 22% 2 30 31 3 11 12 4 −23 −28 5 10 22 Using the returns shown above, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.

X Y Avg Returns 8.80% 11.8% Variance 0.03797 0.05402 Standard Deviations 19.49% 23.24%

Which one of the following is most indicative of a totally efficient stock market?

Zero net present values for all stock investments

To convince investors to accept greater volatility, you must:

increase the risk premium.

Individual investors who continually monitor the financial markets seeking mispriced securities:

make the markets increasingly more efficient.