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 may result in the investor sending good money after bad.

Answer 2

True

Question 3

Aggregate measures of stock prices include dividend income.

Answer 3

False

Question 4

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

Question 5

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

Question 6

Stock indices do not consider taxes on capital gains.

Question 7

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

Question 8

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

Question 9

The realized return includes both dividends and price changes.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

According to the Ibbotson Associates studies of investment returns,larger stocks in the S&P earned higher returns than the smaller companies.

Question 16

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

Question 17

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

Question 18

According to studies of rates of return,yields on treasury bills approximated the rate of inflation.

Question 19

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

Question 20

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

Question 21

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

Question 22

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) AMEX market value index

Question 23

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

Question 24

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 these choices

Question 25

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

Question 26

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 27

If inflation occurs and the Dow Jones industrial average is unchanged,that implies

A) security prices rose
B) security prices fell
C) investors' purchasing power diminished
D) investors' purchasing power increased

Question 28

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 29

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 30

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

Question 31

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 32

Studies of rates of return on large stocks suggest

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

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

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

Question 35

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

Question 36

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 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

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 Nasdaq stocks
D) is a broad-based measure of bonds

Question 39

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 40

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

Question 41

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 42

The market consists of the following stocks.Their prices and number of shares are as follows:
a.If the price of Stock C doubles to $60,what is the percentage increase in the market if an S&P 500 type of measure of the market 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?