Chapter 12 - Practice Problems

If the risk-free rate is 2.2 percent, the inflation rate is 1.9 percent, and the market rate of return is 6.8 percent, what is the amount of the risk premium on a U.S. Treasury bill?

0%

You've observed the following returns on Pryor Farm Produce stock over the past five years: 8 percent, −5 percent, 16 percent, 12 percent, and 8 percent. What is the variance of these returns?

0.00622 Apply formula from question 6

Suppose a stock had an initial price of $30 per share, paid a dividend of $5 per share during the year, and had an ending share price of $33.40. What was the capital gains yield?

11.3% Capital Gain Yield = ending price - initial price / initial price =33.4-30/30 = 0.113333

A stock had annual returns of 5.5 percent, −12 percent, and 15.5 percent for the past three years, respectively. What is the standard deviation of returns for this stock?

13.92% (5.5-12+15.5)/3 = 3% 6=sqrt[(387*5)/3-1] = 13.92% 387 = (5.5-3)^2 +(-12-3)^2...

A stock had annual returns of 7 percent, −28 percent, 13 percent, and 23 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

3.75; 1.72 r1 = 7% , r2 = -28%, r = 13%, r4 = 23%

Over the past four years a stock had prices of $12.78, $13.34, $16.30, and $15.40, respectively. The stock pays an annual dividend of $.50 per share. What is the geometric average return on this stock?

9.98% Holding period return - (P1-P0+D)P0 P1 = price of next year P0 = Price of base year D = dividend

Faraaz is the owner of a stock with annual returns of 17.6 percent, −11.7 percent, 5.6 percent, and 9.7 percent for the past four years. She thinks the stock may achieve a return of 17 percent again this coming year. What is the probability that she is correct?

Greater than 16 percent probability = favorable outcome / possible outcome = (17.6-11.7+5.6+9.7)/4 Probability = favorable outcome / possible outcome = 5.3 / 17 = 31.18% << Greater than 16%

The historical record for the period 1926-2019 supports which one of the following statements?

Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gain would have been less had Vanessa not received the dividends.

A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

−12.5 to 26.7 percent sample mean +- (? * sample standard deviation) = 7% +-(2*9.81%)