Question 1

One year ago, Marcus purchased 400 shares of Maverick Data stock for $21.052.Today, he sold those shares for $56.00 per share.What is the total return on this investment if the dividend yield is 1.9 percent?

Accepted Answer

The answer of One year ago, Marcus purchased 400 shares...

Question 2

Paneer Asphalt Materials pays a constant annual dividend of $1.26 per share on its stock.Last year at this time, the market rate of return on this stock was 14.9 percent.Today, the market rate has fallen to 12.5 percent.What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

Accepted Answer

The answer of Paneer Asphalt Materials pays a constant annual...

Question 3

Based on the past 88 years, the inflation rate averaged 3.0 percent and the U.S.Treasury bill yield was 3.5 percent, and the historical risk premium on small-company stocks was 13.2 percent.If these averages hold, what nominal rate of return should you expect to earn on small-company stocks over the next several years?

Accepted Answer

The answer of Based on the past 88 years, the...

Question 4

Bandor Furniture pays a constant annual dividend.Last year, the dividend yield was 4.9 percent when the stock was selling for $43.50 per share.What is the current price of the stock if the current dividend yield is 4 percent?

Accepted Answer

The dividend amount is constant, so we can calculate it using last year's yield: Dividend = 4.9% of $43.50 = $2.1315. For the current yield of 4%, the price is Dividend / Current Yield = $2.1315 / 0.04 = $53.29.

Question 5

Assume that last year, Catrin earned 9.8 percent on his investments while U.S.Treasury bills yielded 2.3 percent, and the inflation rate was 1.4 percent.What real rate of return did he earn on his investments last year?

Accepted Answer

The answer of Assume that last year, Catrin earned 9.8...

Question 6

Assume large-company stocks returned 12.1 percent on average over the past 88 years.The risk premium on these stocks was 8.6 percent and the inflation rate was 3.0 percent.What was the average nominal risk-free rate of return for those 88 years?

Accepted Answer

The average nominal risk-free rate of return is the inflation rate plus the real risk-free rate of return. The real risk-free rate of return is the risk premium minus the expected inflation rate. Therefore, the average nominal risk-free rate of return is 3.0% + (8.6% - 3.0%) = 8.6%.

Question 7

One year ago, you purchased a 7 percent coupon bond with a face value of $1,000 when it was selling for 102.5 percent of par.Today, you sold this bond for 104 percent of par.What is your total dollar return on this investment?

Accepted Answer

The total dollar return includes both the coupon payment and the capital gain. The bond was purchased for $1,025 (102.5% of $1,000) and sold for $1,040 (104% of $1,000). The coupon payment is $70 (7% of $1,000). The capital gain is $15 ($1,040 - $1,025). Therefore, the total dollar return is $70 + $15 = $85.

Question 8

Assume you earned 12.3 percent on your investments for a time period when the risk-free rate was 4.25 percent and the inflation rate was 1.2 percent.What was your real rate of return for the period?

Accepted Answer

The answer of Assume you earned 12.3 percent on your...

Question 9

If the financial markets are semistrong form efficient, then:

Accepted Answer

In a semistrong form efficient market, all publicly available information is already reflected in stock prices, so only those with private information can have an advantage.

Question 10

The stock of Arbitrage Training is priced at $37 per share and has a dividend yield of 2.8 percent.The firm pays constant annual dividends.What is the amount of the next dividend per share?

Accepted Answer

The dividend yield is calculated as the annual dividend divided by the stock price. Therefore, the next dividend per share is 2.8% of $37, which is $1.04.

Question 11

Over the past five years, a stock returned 8.4 percent, 8.7 percent, 3.2 percent, 1.5 percent, and 11.5 percent, respectively.What is the variance of these returns?

Accepted Answer

To calculate the variance, first find the mean of the returns: (8.4 + 8.7 + 3.2 + 1.5 + 11.5) / 5 = 6.66. Then, calculate each return's deviation from the mean, square it, and find the average of these squared deviations: [(8.4-6.66)² + (8.7-6.66)² + (3.2-6.66)² + (1.5-6.66)² + (11.5-6.66)²] / 5 = 0.006824.

Question 12

Sarah earned a 3.3 percent real rate of return on her investments for the past year.During that time, the risk-free rate was 3.6 percent and the inflation rate was 3.1 percent.What was her nominal rate of return?

Accepted Answer

The answer of Sarah earned a 3.3 percent real rate...

Question 13

One year ago, you bought a stock for $37.25 per share.You received a dividend of $1.27 per share last month and sold the stock today for $39.75 per share.What is the capital gains yield on this investment?

Accepted Answer

The capital gains yield is calculated as (Selling Price - Purchase Price) / Purchase Price. Here, it is ($39.75 - $37.25) / $37.25 = 0.0671 or 6.71 percent.

Question 14

Assume that large-company stocks had an average rate of return of 18.5 percent over the past 55 years while T-bills returned an average of 2.4 percent and inflation averaged 1.8 percent.Given this, the real return on large-company stocks was:

Accepted Answer

The answer of Assume that large-company stocks had an average...

Question 15

One year ago, Stacey purchased 100 shares of KNF stock for $3,245.Today, she sold those shares for $35.00 per share.What is the capital gains yield on this investment if the dividend yield is 1.4 percent?

Accepted Answer

The capital gains yield is calculated as the percentage change in the stock price. Stacey bought the shares at $32.45 each ($3,245/100) and sold them at $35.00 each. The capital gain per share is $35.00 - $32.45 = $2.55. The capital gains yield is ($2.55 / $32.45) * 100% = 7.86%.

Question 16

One year ago, LaTresa purchased 300 shares of Outland Co.stock for $7,092.The stock does not pay any regular dividends but it did pay a special dividend of $.43 a share last week.This morning, she sold her shares for $24.05 a share.What was the total percentage return on this investment?

Accepted Answer

The answer of One year ago, LaTresa purchased 300 shares...

Question 17

One year ago, you purchased 500 shares of stock for $22 a share.The stock pays $0.32 a share in dividends each year.Today, you sold your shares for $24.50 a share.What is your total dollar return on this investment?

Accepted Answer

The total dollar return is calculated by adding the capital gain and the dividend income. The capital gain is ($24.50 - $22) * 500 = $1,250. The dividend income is $0.32 * 500 = $160. Therefore, the total dollar return is $1,250 + $160 = $1,410.

Question 18

Windsor stock has produced returns of 13.8 percent, 11.7 percent, 2.3 percent, -21.4 percent, and 8.9 percent over the past five years, respectively.What is the variance of these returns?

Accepted Answer

The variance of a set of returns is the average of the squared differences between each return and the average return. The average return is the sum of all the returns divided by the number of returns. In this case, the average return is (13.8 + 11.7 + 2.3 - 21.4 + 8.9) / 5 = 6.56%. The variance is then the average of the squared differences between each return and 6.56%. This is calculated as [(13.8 - 6.56)^2 + (11.7 - 6.56)^2 + (2.3 - 6.56)^2 + (-21.4 - 6.56)^2 + (8.9 - 6.56)^2] / 5 = 20.574%.

Question 19

Assume that over the past 88 years, U.S.Treasury bills had an average return of 3.5 percent as compared to 6.1 percent on long-term government bonds.During this same time period, assume inflation averaged 3.0 percent.What was the average nominal risk premium on the long-term government bonds?

Accepted Answer

The answer of Assume that over the past 88 years,...

Question 20

The Lost Continent Store pays a constant dividend.Last year, the dividend yield was 5.75 percent when the stock was selling for $67.5 a share.What must the stock price be today if the market currently requires a 5.25 percent dividend yield on this stock?

Accepted Answer

The dividend amount can be calculated using last year's yield: $67.5 * 5.75% = $3.88125. To find the current stock price with a 5.25% yield, divide the dividend by the new yield: $3.88125 / 5.25% = $73.93.

Quiz 10: Some Lessons From Capital Market History