Deck 10: Investment Returns and Aggregate Measures of Stock Markets

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Stock indices do not consider taxes on capital gains.

Question 12

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 13

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

Question 14

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

Question 15

Realized returns should include both dividends and price changes.

Question 16

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

Question 17

Aggregate measures of stock prices include dividend income.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

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 24

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

Question 25

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

Question 26

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

Question 27

a. Given the following information concerning three stocks, construct a simple average, a value-weighted average, and a geometric average.
       Stock       Price     Shares Outstanding
         A          $10        1,000,000
         B          $14        3,000,000
         C          $21       10,000,000

b. What are averages if each price rises to $11, $17, and $35, respectively?

c. What is the percentage increase in each average?

Question 28

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 29

You bought a stock for $28.29 that paid the following dividends

After the third year, you sold the stock for $35. What was the annual rate of return?

Question 30

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

Question 31

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 32

The Russell 1000 index

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

Question 33

The S&P 500 uses

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

Question 34

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

Question 35

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 36

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

Question 37

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

Question 38

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 39

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 40

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 41

The market consists of the following stocks. Their prices and number of shares are as follows:
    Stock         Price   Number of Shares Outstanding
      A            $10              100,000
      B             20               10,000
      C             30              200,000
      D             40               50,000

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?