Unit 12

If you receive $2 a dividend per share on your 100 shares, you total dividend income is:

$200

Which of the following are needed to describe the distribution of stock returns?

- The mean return - The standard deviation of returns

Which of the following are ways to make money by investing in stocks?

-Capital gains -Dividends

Which of the following are true?

-Common stocks frequently experience negative returns -T-Bills sometimes outperform common stocks

What are two components of Risky Return (U) in the total return equation?

-Market risk -Unsystematic risk

The true risk of any investment comes from _________?

-surprises -unanticipated events

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?

15% (114-100+1)/100 = 15%

True or False: A Well-Diversified portfolio will eliminate all risk?

False

True or False: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios?

False

True or False: The surprise is information the market uses to form the expectation of the return on the stock?

False

What is the SLOPE of the Security Market Line (SML)?

The Market Risk Premium

True or False: The PREMIUM can be interpreted as a reward for bearing risk?

True

What is a risk premium?

It is additional compensation for taking risk, over and above the risk-free rate

What is an UNCERTAIN or Risky return?

It is the portion of the return that depends on information that is currently unknown.

The following are examples of a portfolio:

-investing $100,000 in the stocks of 50 publicly traded corporations -investing $100,000 in a combination of stocks and bonds -investing $100,000 in a combination of US and Asian stocks

If stock ABC has a mean return of 10 percent with a standard deviation of 5 percent, then the probability of earning a negative is approximately __________percent.

0% is 2 SDs below the mean (0.10-(2 & *0.05) Probability of R being more than two standard deviations from the mean is (1- 0.95), but that means either two standard deviations above or below the mean. The probability of it being 2 standard deviations below the mean, divide by w (half are above and half are below in a normal distribution) 0.05/2 == 2.5%

_____ risk is reduced as more securities are added to the portfolio?

1. Unsystematic. 2. Diversifiable. 3. Company-specific.

As more securities are added to a portfolio, what will happen to the portfolio's total UNSYSTEMATIC risk?

1. it is likely to decrease. 2. It may eventually be almost totally eliminated.

If a stock's returns for years 1 to 4 were 3%, 5%, and -2%, what is the standard deviation of these returns?

4.203%

If the annual stock market returns for Berry Company were 19 percent, 13 percent, and -8 percent, what was the arithmetic mean for those 3 years?

8%

When a dollar in the FUTURE is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:

already knew about most of the news item

If your total dollar return was $7 and your dividend was $2, then the price change on your stock must have been ____

$5 7+2

The price of a stock drops from $50 to $40 per share. If you own 50 shares, your total capital loss in _____.

$500

Which of the following statements are true about variance?

-Standard deviation is the square root of variance -Variance is a measure of the squared deviations of a security's return from its expected return

Percentage returns are more convenient than dollar returns because they ______.

-apply to any amount invested -allow comparison against other investments

What two factors determine a stock's total return?

-expected return -unexpected return

Studying market history can reward us by demonstrating that:

-the greater the potential reward is, the GREATER the risk -there is a reward for bearing risk.

By definition, what is the beta of the average asset equal to?

1

Percentage returns are more convenient that dollar returns because they:

1. Apply to any amount invested. 2. Allow comparison against other investments.

The computation of variance require four step. Place the steps in the correct order from the first step to the last step.

1. Calculating the expected return. 2. Calculate the deviation of each return from the expected return. 3. Square each deviation. 4. Calculate the average squared deviation.

Which of the following are examples of UNSYSTEMATIC RISK?

1. Changes is management. 2. Labor strikes.

The Ibbotson-Sinquefield data shows that:

1. Long-term corporate bonds had less risk or variability than stocks. 2. U.S. T-bills had the lowest risk or variability

The normal distribution is completely described by the _____ and ______.

1. Mean. 2. Variance or standard deviation.

Which of the following are examples of Systematic risk?

1. Regulatory changes in tax rates. 2. Future rates of inflation.

Arrange the following investments from HIGHEST RISK to LOWESt risk (standard deviation) based on what our study of capital market history from 1926 -2014 has revealed as shown in table 10:3

1. Small company common stock. 2. Large company common stock. 3. Long-term corporate bonds. 4. Long term government bonds. 5. U.S. Treasury bills.

Arrange the following investments from lowest historical risk premium to the highest historical risk premium.

1. U.S. Treasury bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stock

What is the expected return of a portfolio consisting of Stocks A and B if the expeted return is 10% for A and 15% for B? Assume you are equally invested in both the stocks.

12.5%

Suppose you buy a share of stock for $100. At the end of one year the stock price is $114 and a $1 dividend is paid. If you do not sell the stock, your total annual return is ______

15% (1/100) + ((114-100)/100)

The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately.

2.5%

Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of __________ years.

20

The standard deviation for large-company stock returns from 1926-2014 is:

20.1%

You buy a stock for $50. Its price rises to $55, and it pays a $2 dividend in a year. You do not sell the stock. Your dividend yield is _____%.

4 2/50 = 4

From 1900 to 2010, the average stock market risk premium of the U.S. was ___.

7.2%

John's portfolio consists of $1,200 worth of Chi Corporation common stock and $400 worth of Lambda Corporation common stock. Lambda's portfolio weight is 25% , and Chi's portfolio is weight is:

75.00%

2008 was a bad year for markets worldwide. One of the worst hit was the Icelandic Exchange where shares priced dropped ___ in one day.

76%

ABC has a beta of 2.5 and XYZ has a beta of 1.5. The Risk-free rate is 4 percent and the market risk premium is 9 percent. What is the expected return on a portfolio that is equally invested in ABC and XYZ?

Beta = (2.5 +1.5)/2 = 2 Expected return = 4% +2(9%) = 22%

What is the expected return for a security if the Risk-Free Rate is 5%, the expected return on the Market is 9%, and the security's beta is 1.5?

Expected return for a security = 5 % + 1.5 *(9 -5 ) = 11%

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future

A security has a beta of 1, a Market Risk Premium of 8%, and a risk-free rate of 3%. What will happen to the expected return if the beat doubles?

Old Expected return is 3% + 1 *8 =11% New return is 3% + 2 * 8 % = 19 which is less than double. The expected return will increase to 19% from 11%.

_____________ risk is the only risk important to the well diversified investor.

Systematic

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CP)

According to the CAPITAL ASSET Pricing Model (CAPM) , what is the expected return on a security with a beta of zero?

The risk-free rate of return

How are UNsystematic Risks of two different companies in two different industries related?

There is no relationship

The calculation of a portfolio beta is similar to the calculation of:

a portfolio's expected return

A positive capital gain on a stock results from___.

an increase in price

The dividend yield for a one-year period is equal to the annual dividend amount divided by the ___.

beginning stock price

The percentage change in the price of a stock over a period of time is called its _______

capital gain yield

The total dollar return is the sum of dividends and___.

capital gains or losses

The average return on the stock market can be used to _____.

compare stock returns with the returns on other securities

The minimum required on a new project is known as the:

cost of capital

Historical return data indicates that as the number of securities in a portfolio increases, the Standard deviation of returns for the portfolio:

declines

Historically, there is a(n) _____ relationship between risk and expected return in the stock market.

direct

The _____ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.

excess

Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on ___ important types of financial investments.

five

in 2008, the prices of Long-term U.S. Treasury bonds ____________.

gained 40%

The second lesson from studying capital market history is that risk is:

handsomely rewarded

The risk-return relationship states that a riskier investment should demand a __________ return.

higher

Dividends are the _______ component of the total return from investing in a stock.

income

If the dispersion of returns on a particular security is very spread out form the security's mean return, the security:

is highly risky

Systematic risk is also called _______risk.

market

Systematic risk will ________ when securities are added to a portfolio.

not change

In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-Bills with a maturity of _____ month(s).

one

Historically, the real return on Treasury bills has been:

quite low

If an asset has a Reward-to-Risk Ratio of 60%, that means it has a _________ of 6.0% per unit of ________.

risk premium; systematic risk

To determine the appropriate required return for an investment, we can use ___________.

the Security Market Line

The square of the standard deviation is equal to the___

variance