Deck 16: Investment Returns

Question 1

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?

Answer 1

$\$ 28.29 = \frac { \$ 1.00 } { ( 1 + r ) } + \frac { \$ 1.50 } { ( 1 + r ) ^ { 2 } } + \frac { \$ 1.80 + \$ 35 } { ( 1 + r ) ^ { 3 } }$
Select a rate and determine if it equates both sides of the equation. For example, select 12 percent:
$\$ 1 ( .893 ) + 1.50 ( .797 ) + 1.80 ( .712 ) + 35 ( .712 ) = \$ 28.29$
The annual rate of return is 12 percent.
The same answer may be derived using a financial calculator, but it requires the student to enter unequal cash inflows for each period.

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Studies of investment returns suggest that the stocks of small companies (small cap) generate higher returns than the stocks of larger companies (large cap).​

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

Over time, holding period returns tend to overstate the annual rate of return.​

Question 10

Studies of realized rates of return assume that investors do not reinvest dividend income.​

Question 11

The Ibbotson Associates studies of rates of return suggest that
1) Treasury bills match the rate of inflation
2) stocks of smaller companies generate higher returns than larger companies
3) corporate bonds generate higher returns than Treasury bonds​​

A)1 and 2​
B)​1 and 3
C)​2 and 3
D)​all three

Question 12

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 13

Realized returns include both dividends and price changes.​

Question 14

An investment's internal rate of return equates​

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

Question 15

Studies of rates of return on common stocks suggest​

A) ​the average return is about 7.4 percent annually
B) ​over a period of years, the rate is approximately 9 to 10 percent
C) ​equity investors rarely sustain losses
D) ​dividends account for over half the return

Question 16

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