Question 1

Ivanhoe Energy Inc had realized returns of 5.5%,-3.6%,8%,and 7.5% over four quarters.What is the quarterly standard deviation of returns for Ivanhoe?

Accepted Answer

C) Average return = (5.5 - 3.6 + 8 + 7.5) / 4 = 4.35;
Variance = ((5.5 - 4.35)^2 + (-3.6 - 4.35)^2 + (8 - 4.35)^2 + (7.5 -4.35)^2 ))/(4 - 1) = 29.26
Standard deviation =29.26^0.5 = 5.41%

Question 2

The standard deviation of returns of: I.small capitalization stocks is higher than that of large capitalization stocks.
II) large capitalization stocks is lower than that of corporate bonds.
III)corporate bonds is higher than that of Treasury bills.
Which statement is true?

Accepted Answer

Statement I is true because small cap stocks are generally more volatile and risky than large cap stocks, leading to a higher standard deviation of returns. Statement III is also true because corporate bonds carry more credit risk than Treasury bills, hence a higher standard deviation of returns. Statement II is not necessarily true as it depends on the specific stocks and bonds being compared. There may be some large cap stocks with higher standard deviation of returns than some corporate bonds, and vice versa.

Question 3

Amazon.com stock prices gave a realized return of 5%,-5%,10%,and -10% over four successive quarters.What is the annual realized return for Amazon.com for the year?

Accepted Answer

A) 1.05 × 0.95 × 1.10 × 0.9 = 0.9875; 0.9875 - 1 = -1.25%

Question 4

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.What was the average compound annual return per year?

Accepted Answer

C) $1 grows to 1 × 1.1762 × 0.9129 × 1.0719 × 1.1299 = $1.30 over 4 years.
1.30^(1/4) - 1 = 6.8%

Question 5

Tesla Motors stock had a realized return of 18%,4%,-12%,and -6% over four successive quarters.What is your annual realized return if you bought Tesla at the beginning of the year and sold it at the end of the year?

Accepted Answer

A) 1.18 × 1.04 × 0.88 × 0.94 - 1 = 1.5%

Question 6

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.What is the standard deviation of the index returns over these four years?

Accepted Answer

E) Average return = (17.61 - 8.71 + 7.19 + 12.99) / 4 = 7.27;
Variance = ((17.61 - 7.27)^2 + (-8.71 - 7.27)^2 + (7.19 - 7.27)^2 + (12.99 - 7.27)^2 ))/(4 - 1) = 131.67
Standard deviation = 131.67^0.5 = 11.47%

Question 7

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.If you invested $10,000 in the index at the beginning of 2010,what amount would your investment have been worth at the end of 2013?

Accepted Answer

B) $10000 grows to 10000 × 1.1762 × 0.9129 × 1.0719 × 1.1299 = $13,000

Question 8

You purchased Enron stock at a price of $30 per share.Its price was $20 after six months and the company declared bankruptcy at the end of the next six months.The realized return over the last year is:

Accepted Answer

D) 0 - 30 / 30 = -100%

Question 9

Your investment over one year had a realized return of 7% and a dividend of $1.25.If the sale price was $36 per share,what was the cost of the investment?

Accepted Answer

D) (36 + 1.25)/1.07 = $34.81

Question 10

Ford Motor Company had realized returns of 10%,20%,20%,and 10% over four quarters.What is the quarterly standard deviation of returns for Ford calculated from this sample?

Accepted Answer

A) Average return = (10 + 20 + 20 +10) / 4 = 15;
Variance = ((10 - 15)^2 + (20 - 15)^2 + (20 - 15)^2 + (10 - 15)^2 ))/(4 - 1) = 33.33
Standard deviation = 33.33^0.5 = 5.77%

Question 11

Bombardier Inc had realized returns of -3%,-2%,-5%,and -7% over four quarters.What is the quarterly standard deviation of returns for Bombardier?

Accepted Answer

D) Average return = (-3 -2 -5 -7) / 4 = -4.25;
Variance = ((-3 + 4.25)^2 + (-2 + 4.25)^2 + (-5 + 4.25)^2 + (-7 + 4.25)^2 ))/(4 - 1) = 4.92
Standard deviation = 4.92^0.5 = 2.2%

Question 12

The S&P TSX Composite index delivered a return of 14.48%,24.13%,17.26% and 9.83% over four successive years.What is the arithmetic average annual return per year?

Accepted Answer

A) (14.48 + 24.13 + 17.26 + 9.83)/4 = 16.43%

Question 13

Suppose the quarterly arithmetic average return for a stock is 5% per quarter and the stock gives a return of 10% each over the next two quarters.The arithmetic average return over the six quarters is:

Accepted Answer

B) (5 + 5 + 5 + 5 + 10 + 10) / 6 = 6.67%

Question 14

The geometric average annual return for a large capitalization stock portfolio is 12% for ten years and 5% per year for the next five years.The geometric average annual return for the entire 15-year period is:

Accepted Answer

B) Compound return for first ten years = (1.12)^10 = 3.1058;
compound return for next 5 years = (1.05)^5 = 1.27628;
total return over 15 years = 3.1058 × 1.27628 = 3.9639;
geometric average annual return = (3.9639)^(1/15) = 1.0962; hence answer = 9.62%

Question 15

Lululemon Athletica stock had a realized return of 7%,-2%,-3%,and -8% over four successive quarters.What is your annual realized return if you bought Lululemon at the beginning of the year and sold it at the end of the year?

Accepted Answer

D) 1.07 × .98 × .97 × .92 - 1 = -6.4%

Question 16

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.What is a 95% confidence interval for the 2014 return?

Accepted Answer

C) Average return = (17.61 - 8.71 + 7.19 + 12.99) / 4 = 7.27;
Variance = ((17.61 - 7.27)^2 + (-8.71 - 7.27)^2 + (7.19 - 7.27)^2 + (12.99 - 7.27)^2 ))/(4 - 1) = 131.67
Standard deviation = 131.67^0.5 = 11.47%
Average +/- 2 × standard deviation = 7.27 - 11.47 to 7.27 + 11.47 = -4.2% to 18.74%

Question 17

Your investment over one year had a realized return of 9% and a dividend yield of 6%.If the sale price was $45 per share,what was the cost of the investment?

Accepted Answer

B) Capital Gain Yield = 9 -6 = 3%; 45/1.03 = $43.69

Question 18

You purchase a 30-year,zero-coupon bond for a price of $20.The bond will pay back $100 after 30 years and make no interim payments.The annual compounded return (geometric average return)on this investment is:

Accepted Answer

D) Using a financial calculator: N = 30, PV = -20, FV = 100; CPT = I/Y; I/Y = 5.51%

Question 19

IGM Realty had a price of $30,$30,$35,$33,and $25 at the end of the last five quarters.If IGM pays a dividend of $2 at the end of each quarter,what is the annual realized return on IGM?

Accepted Answer

B)
 11ea4813_56ca_2c7e_a73a_b9ca560e07d0_TB1618_00

Question 20

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year.The geometric average annual return is:

Accepted Answer

E) 1.2 × 1.2 × 1.1 = 1.584; geometric average = (1.584)^0.333 = 1.1655; hence = 16.55%

Quiz 10: Risk and Return in Capital Markets