Deck 10: Investment Returns and Aggregate Measures of Stock Markets

Question 1

Bond averages that are expressed in percentages are not comparable to the S&P 500.

Answer 1

True

Question 2

With dollar?cost averaging, the investor purchases more securities when their prices rise.

Answer 2

False

Question 3

Movements in stock prices are often illustrated using relative (percentage) price changes instead of absolute price changes.

Answer 3

True

Question 4

Studies of investment returns suggest that investors can expect to earn at least 15 percent annually.

Question 5

Comparisons of stock performance should use percentage changes instead of absolute price changes.

Question 6

The rate of return on a stock considers the price change but not dividend income.

Question 7

Stock indices do not consider taxes on capital gains.

Question 8

Aggregate securities prices may be measured by using value?weighted or geometric averages.

Question 9

Aggregate measures of stock prices include dividend
income.

Question 10

Studies of investments returns (e.g., the Ibbotson Associates studies of investment returns) determined that large-cap stocks in the S&P earned higher returns than the smaller companies.

Question 11

The Russell 3000 is a broad-based measure of bond prices.

Question 12

Dollar?cost averaging is achieved by periodic, equal
dollar investments.

Question 13

Averaging down may result in the investor sending good money after bad.

Question 14

If a stock increased from $25 to $50 in five years, the annual rate of return was 20 percent.

Question 15

The S&P 500 stock index is value-weighted.

Question 16

Averaging down will prove to be profitable only if the price of the stock subsequently rises.

Question 17

Realized returns should include both dividends and price changes.

Question 18

The Dow Jones industrial and utility averages include a relatively small number of stocks.

Question 19

Historical studies of investment returns suggest that the stocks of small companies generate higher returns than the stocks of larger companies.

Question 20

Indices of Nasdaq stocks tend to be less volatile than the S&P 500 index.

Question 21

Historical studies of rates of return on large
Stocks suggest

A) the average return is about 6.4 percent annually
B) over a period of years, the rate approximates 9-10 percent
C) equity investors rarely sustain losses
D) dividends account for over half the return

Question 22

To determine the realized return on an investment, the investor needs to know
1) income received
2) the cost of an investment
3) the sale price of the investment

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 23

Studies of realized rates of return assume that
Dividend income is not reinvested.

Question 24

You bought a stock for $20 and sold it for $59.72 after six years. What was the annual rate of return?

Question 25

Given the following information concerning three stocks, construct a simple average, a value-weighted average, and a geometric average.

b. What are averages if each price rises to $11, $17, and $35, respectively?
c. What is the percentage increase in each average?

Question 26

If a stock rose from $10 to $30 over ten years, the
Annual rate of return

A) was 20 percent
B) was greater than 20 percent
C) was less than 20 percent
D) cannot be determined

Question 27

Movements in individual stock prices tend to be

A) positively correlated
B) positively correlated with inflation
C) negatively correlated
D) positively correlated with changes in interest rates
PROBLEMS

Question 28

Dollar cost averaging is

A) periodically buying a round lot of stock
B) periodically investing a specified dollar amount in a stock
C) a means to increase the average cost basis
D) a means to insure a positive return

Question 29

The S&P 500 uses

A) a simple average
B) a compound average
C) a geometric average
D) a value-weighted average

Question 30

The calculation of a rate of return assumes dividend
income is reinvested at the current dividend yield.

Question 31

The S&P 500 stock index is more sensitive to changes
in the prices of small stocks than the stocks of large companies.

Question 32

The Russell 1000 index

A) combines 1000 stocks and bonds
B) uses the 1000 largest Nasdaq stocks
C) is a broad measure of listed and over-the-counter (Nasdaq) stocks
D) is a broad-based measure of bonds

Question 33

The Wilshire 5000 stock index is more broad based than the S&P 500 stock index.

Question 34

You bought a stock for $28.29 that paid the following dividends
Year 1 2 3
Dividend $1.00 $1.50 $1.80
After the third year, you sold the stock for $35. What was the annual rate of return?

Question 35

Over time, holding period returns tend to overstate
the true annualized rate of return.

Question 36

Which of the following is the least broad-based
Measure of stock prices?

A) Nasdaq market index
B) Dow Jones industrial average
C) S&P 500 stock index
D) Russell 3000

Question 37

An investment's internal rate of return equates

A) dividend payments and capital gains
B) cash outflows and subsequent cash inflows
C) initial cash outflow and the sale price
D) dividend payments and the investment's cost

Question 38

The Standard & Poor's 500 stock index illustrates

A) a value-weighted index
B) a simple average
C) a geometric index
D) an exponential index

Question 39

Holding period returns for greater than a year do not give an accurate measure of the true rate of return.

Question 40

A strategy of averaging down will be profitable if

A) the price of the stock continues to fall
B) the firm pays more dividends
C) the firm retains earnings
D) the price of the stock subsequently rises

Question 41

The market consists of the following stocks. Their prices and number of shares are as follows:

a. The price of Stock C doubles to $60. What is the percentage increase in the market if a S&P 500 type of measure of the market (value-weighted average) is used?
b. Repeat question (a) but use a Value Line type of measure of the market (i.e., a geometric average) to determine the percentage increase.
c. Suppose the price of stock B doubled instead of stock C. How would the market have fared using the aggregate measures employed in (a) and (b)? Why are your answers different?

Question 42

You sold 200 shares of DOG short for $24. After three years you closed your position at $17. DOG paid an annual dividend of $1, what was the annualized (compound) return on the trade?
SOLUTIONS TO PROBLEMS