Chapter 1- Risk and Return

Jim began his investing program with a $4,000 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar-weighted average return? 1.6 percent 2.2 percent 2.6 percent 3.2 percent 3.6 percent

2.6

Over the past four years, a stock produced returns of 13, 6, -5, and 18 percent, respectively. What is the standard deviation of these returns? 8.63 percent 9.93 percent 9.97 percent 10.11 percent 10.15 percent

9.97

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

Which one of the following had the highest average return for the period 1926-2012? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bond

D

For the period 1926-2012, the annual return on large-company stocks: A. was negative following every three-year period of positive returns. B. was only negative for two or more consecutive years during the Great Depression. C. remained negative for at least two consecutive years anytime that it was negative. D. never exceeded a positive 30 percent nor lost more than 20 percent. E. was unpredictable based on the prior year's performance.

E

The geometric mean return on large-company stocks for the 1926-2012 period: A. is approximately equal to the arithmetic mean return plus one-half of the standard deviation. B. exceeds the arithmetic mean return. C. is approximately equal to the arithmetic mean return minus one-half of the standard deviation. D. is approximately equal to the arithmetic mean return plus one-half of the variance. E. is less than the arithmetic mean return.

E

The risk-free rate is: A. another term for the dividend yield. B. defined as the increase in the value of a share of stock over time. C. the rate of return earned on an investment in a firm that you personally own. D. defined as the total of the capital gains yield plus the dividend yield. E. the rate of return on a riskless investment.

E

Which one of the following had the smallest standard deviation of returns for the period 1926-2012? A. large-company stocks B. small-company stocks C. long-term government bonds D. intermediate-term government bonds E. long-term corporate bonds

E

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: A. positive but less than the geometric average return. B. less than the geometric return and could be negative, zero, or positive. C. equal to the geometric average return. D. either equal to or greater than the geometric average return. E. greater than the geometric average return.

E

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 percent 24.77 percent 25.70 percent 26.03 percent 27.67 percent

HPR = ($41.5 - $36)/$36 = .152778 Annualized rate of return = (1 + .152778)12/8 - 1 = 23.77 percent

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? -44.69 percent -40.14 percent -33.00 percent -31.95 percent -28.07 percent

HPR = ($42 - $48 + $0.22)/$48 = -.120417 Annualized return = (1 - .120417)12/4 - 1 = -31.95 percent

An asset has an average historical rate of return of 13.2 percent and a variance of .00972196. What range of returns would you expect to see approximately two-thirds of the time? -2.28 to +24.48 percent -6.52 to +32.92 percent -9.58 to +38.8 percent +3.34 to +23.06 percent +13.1 to +13.3 percent

Range = .132 ± √(.00972196) = +3.34 to +23.06 percent

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? -41.8 to +65.0 percent -34.4 to +53.6 percent -24.0 to +47.2 percent -6.2 to +29.4 percent -5.4 to +41.0 percent

Range = 11.6 percent ± 2(17.8 percent) = -24.0 to +47.2 percent