Chapter 10
The ______ rate of return is the difference between risky returns and risk-free returns. a. subliminal b. real c. excess d. nominal
C
A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock. a. True b. False
A
The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ____. a. initial stock price b. cost of capital c. dividend yield d. ending stock price
A
A very useful measure of expected future yearly returns is(are) a. the arithmetic mean. b. both the arithmetic and geometric means. c. the average of the arithmetic and geometric mean. d. the geometric mean.
D
Dividends are the ______ component of the total return from investing in a stock. a. amortization b. price appreciation c. capital gains d. income
D
If a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by ____. a. [(1.10 + 1.20)(1/2)] - 1 b. (1.10/1.20)1/2 + 1 c. [1.10 + 1.20]1/2 +1 d. [(1.10)(1.20)]1/2 - 1
D
The Ibbotson-Sinquefield studies present year-by-year historical rates for five types of financial instruments. Which of the following are included in those five types? a. small-company common stocks b. short-term U.S. government bonds c. large-company preferred stocks d. large-company common stocks e. U.S. Treasury bills
A, D & E
The average return on the stock market can be used to ___. a. find ways to beat the market b. accurately forecast the market's returns in the future c. compare stock returns with the returns on other securities
C
The change in stock price divided by the initial price is the a. total percentage return. b. dividend yield. c. capital gains yield. d. total dollar return.
C
U.S. Treasury bills are considered risk-free because a. the stock market enforces a floor on T-bills. b. they are guaranteed by the NYSE. c. the government can raise taxes to pay for the debt it incurs. d. their average return over the last decade has been in excess of 10%.
C
When a company declares a dividend, shareholders generally receive a. store credit. b. promissory notes. c. interest income. d. cash.
D
If the risk premium of stock JKL is 5 percent while the standard deviation is 10 percent, then the Sharpe ratio equals ______. a. 1.00 b. 0.75 c. 2.00 d. 0.50
D (0.05/0.01)
You buy a stock for $100. In one year its price rises to $114, and it pays a $1 dividend. Your capital gains yield is ____. a. 13.08% b. 1% c. 0.93% d. 14%
D [(114-100)/100]
Which of the following are true of the Sharpe ratio? Select all that apply a. It is a measure of return to the level of risk taken. b. It is the variance divided by the risk premium. c. It is the risk premium divided by the standard deviation. d. It is a measure of the level of risk to the initial investment.
A & C
Which of the following positive financial events occurred in the U.S. in 2008? Select all that apply a. Long-term bonds had positive returns. b. Inflation was only 5 percent. c. T-bills had positive returns d. Corporate bonds rose 15 percent
A & C
One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return? a. 15% b. 13% c. 14% d. 12%
A [(114-100+1)/100]
The Ibbotson-Sinquefield studies deal with rates of return on: Select all that apply a. common stocks. b. bonds. c. preferred stocks. d. equity investments. e. Treasury bills.
A, B, & E
The dividend yield for a one-year period is equal to the annual dividend amount divided by the a. average stock price for the year. b. stock price at the beginning of the year. c. stock price at the end of the year.
B
If you buy a stock for $10 and later sell it for $16, you will have a a. dividend of $6. b. capital loss of $6. c. capital gain of $16. d. capital gain of $6.
C
The arithmetic average rate of return measures the ____. a. compound return in an average year b. compound return per year c. return in an average year over a given period d. average return in a year
C
If you buy 100 shares of ABC stock at $5 per share, your total investment is ___. a. $100 b. $50 c. $5 d. $500
D
One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return? a. 12% b. 15% c. 14% d. 13%
B [(114-100+1)/100]
What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc. for $32? a. $3,200 b. $6,400 c. Unlimited d. $1,600
B [(32-0)x200]
Which of the following are true? a. Common stocks frequently experience negative returns. b. T-bills always outperform common stocks. c. Common stocks rarely experience negative returns. d. T-bills sometimes outperform common stocks.
A & D
In the Ibbotson-Sinquefield studies, bonds in the long-term U.S. government bond portfolio had maturities of ______ years. a. 5 b. 20 c. 10 d. 1 e. 30
B
In the Ibbotson-Sinquefield studies, the small stock portfolio includes the bottom _________ of NYSE listed stocks. a. 10% b. fifth c. 25% d. 50% e. third
B
The returns of the Ibbotson-Sinquefield studies are adjusted for taxes and transactions costs. a. True b. False
B
The total dollar return on a stock is the sum of the ______ and the ______. a. capital gains; interest payments b. dividends; capital gains c. interest payments; dividends
B
In the Ibbotson-Sinquefield studies, the large-company common stock portfolio is based on the a. Dow Jones Industrial Average by price value. b. Wilshire 5000 index. c. sample of the smallest Canadian companies by market cap. d. S&P Composite Index.
D
The Sharpe ratio is the stock's risk premium divided by its ____. a. mean, or average, return b. variance c. beta d. standard deviation
D
The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is ___. a. $100 b. $10 c. $5 d. $500
D
An unrealized capital gain: Select all that apply a. exists when stock is sold. b. is included as part of the total return. c. is excluded from the total return. d. exists when stock is held.
B & D
A probability distribution tends to have a smooth shape when the number of observations is a. very large. b. about 30 or so. c. about 100 or so. d. very small.
A
In the Ibbotson-Sinquefield studies, year-by-year real returns can be calculated by a. subtracting annual inflation. b. dividing by annual inflation. c. adding annual inflation. d. multiplying by annual inflation.
A
When dealing with the history of capital market returns, an average stock market return is useful because it a. accurately forecasts future short-run returns. b. guarantees the long-term future rate of return. c. is the best estimate of any one year's stock market return during the specified period. d. simplifies detailed market data.
C & D
Which of the following are true of a frequency distribution of stock returns? Select all that apply a. The height of the graph gives the range of the returns. b. The horizontal axis of the graph gives the number of sample observations. c. The horizontal axis of the graph gives the range of the returns. d. The height of the graph gives the number of sample observations.
C & D
Percentage returns are more convenient than dollar returns because they ____. a. apply to any amount invested b. are more accurate than dollar returns
A
To calculate the mean of a frequency distribution, we add up all of the values and divide by the total number of observations. a. True b. False
A
Percentage returns: Select all that apply a. can apply to any amount invested. b. are more convenient to summarize information than dollar returns. c. can only apply to a specific investment. d. are less convenient to summarize information than dollar returns.
A & B
The Ibbotson-Sinquefield data shows that ___. Select all that apply a. long-term corporate bonds had less risk or variability than stocks b. inflation was always higher than the U.S. T-bill yield c. large-company stocks had higher returns than small-company stocks d. T-bills had the lowest risk or variability
A & D
The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following? Select all that apply a. Transactions costs b. Bond coupons c. Dividends d. Taxes
A & D
The Ibbotson-Sinquefield data show that over the long-term: Select all that apply a. long-term corporate bonds had the lowest risk. b. small-company stocks generated the highest average return. c. large-company stocks generated the highest average return. d. T-bills, which had the lowest risk, generated the lowest return. e. small-company stocks had the highest risk level.
B, D & E
The ______ period rate of return is simply the rate of return over some arbitrary investment period. a. holding b. total c. carryover d. cumulative
A
Your total year-end value from a one-year investment equals the initial investment plus the total dollar return. It also equals the a. proceeds from the stock sale plus dividends. b. proceeds from the stock sale minus dividends. c. dividends plus the initial investment. d. dividends minus the sale proceeds.
A
Which of the following are ways to make money by investing in stocks? Select all that apply a. Capital gains b. Dividends c. Amortization d. Interest
A & B
You bought one share of stock for $100 and received a $2 dividend. If the price of the stock rose to $103, then your total dollar return would be ______. a. $5 b. $4 c. $2 d. $3
A (103-100+2)
A stock has annual returns of 15 percent, 32 percent, and -25 percent.What is the 3-year holding period return? a. 13.85% b. 14.24% c. 22% d. 13%
A [(1.15x1.32x0.75)-1]
The geometric mean: Select all that apply a. takes into account compounding. b. tells you what you earned in a typical year. c. tells you what you actually earned per year on average. d. is a very useful measure of past performance. e. is a very useful measure of expected future yearly returns.
A, C, & D
More volatility in returns produces ______ difference between the arithmetic and geometric averages. a. no change in the b. larger c. smaller
B
The two potential ways to make money as a stockholder are through _______ and capital appreciation. a. coupon payments b. dividends c. bankruptcy distributions d. interest payments
B
What is the approximate standard deviation of the returns on an average stock? a. 17% b. 50% c. 25% d. 20%
B
Which of the following is true of the average return on the stock market? a. It is used to determine the returns on other securities. b. It is compared with the returns on other securities. c. It is an average of risk-free securities.
B
A frequency distribution of stock returns displays ____. Select all that apply a. the average of all data points b. various ranges of returns on the horizontal axis c. the frequency of occurrence for each rate of return range d. the standard deviation of all data points
B & C
Which of the following are true of the average return? Select all that apply a. It is the best estimate of the return that an investor will realize in a future period. b. It is the best estimate of the return that an investor could realize in a particular year. c. It summarizes the history of returns. d. It summarizes future returns.
B & C
The dividend yield is: Select all that apply a. calculated as the average stock price for the period divided by the dividend for the period. b. calculated as the dividend for the period divided by the stock price at the beginning of the period. c. the stock price expressed as a percentage of the dividend. d. the dividend expressed as a percentage of the stock price.
B & D
What are some important lessons from the 2008 financial crisis? Select all that apply a. Investors should invest all of their funds in T-bills. b. The stock market is risky. c. The risk premium going forward will probably be lower. d. Diversification is important.
B & D
Which of the following assumptions are critical to estimating future equity risk premiums? Select all that apply a. Difference between future arithmetic and geometric mean returns b. Risk aversion of future investors c. Historical risk environment d. Future risk environment
B & D
Which of the following are true of the dispersion of a security distribution? Select all that apply a. A wide dispersion indicates less uncertainty. b. It is a measure of how much a return can deviate from the mean return. c. Dispersion can be used to measure risk. d. A wide dispersion indicates greater uncertainty.
B, C, & D