Question 1

Which of the following statements concerning the standard deviation are correct?
I. The greater the standard deviation,the lower the risk.
II. The standard deviation is a measure of volatility.
III. The higher the standard deviation,the less certain the rate of return in any one given year.
IV. The higher the standard deviation,the higher the expected return.
A) I and III only
B) II, III, and IV only
C) I, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Accepted Answer

Statement I is incorrect because higher standard deviation indicates higher risk. Statement II is correct because standard deviation measures the variability or volatility of returns. Statement III is correct because higher standard deviation means greater uncertainty in returns. Statement IV is incorrect because there is no direct relationship between the standard deviation and expected return.

Question 2

The standard deviation on small company stocks: I. is greater than the standard deviation on large company stocks.
II) is less than the standard deviation on large company stocks.
III) had an average value of about 33% for the period 1926 to 2011.
IV) had an average value of about 20% for the period 1926 to 2011.
A) I and III only
B) I and II only
C) II and III only
D) II and IV only
E) I and IV only

Accepted Answer

Small company stocks typically have higher volatility and thus a greater standard deviation than large company stocks. Historical data shows that the average standard deviation for small company stocks was about 33% from 1926 to 2011.

Question 3

Which of the following statements are correct concerning the variance of the annual returns on an investment?
I. The larger the variance,the more the actual returns tend to differ from the average return.
II. The larger the variance,the larger the standard deviation.
III. The larger the variance,the greater the risk of the investment.
IV. The larger the variance,the higher the expected return.
A) I and III only
B) II, III, and IV only
C) I, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Accepted Answer

The answer of Which of the following statements are correct...

Question 4

The dollar value of the world stock market capitalization,from largest to smallest is:
A) Europe, United States, United Kingdom, Japan.
B) United States, Japan, Europe, United Kingdom.
C) United States, Europe, Japan, United Kingdom.
D) Japan, United States, Europe, United Kingdom.
E) Japan, United States, United Kingdom, EuropE.

Accepted Answer

According to recent data, the world stock market capitalization is led by the United States, followed by Europe, then Japan, and finally the United Kingdom. Choice C is the only option that follows this order.

Question 5

How much of total world stock market capitalization is from the United States in 2011?
A) Approximately 10%
B) Approximately 25%
C) Approximately 45%
D) Approximately 57%
E) Approximately 72%

Accepted Answer

In 2011, the United States accounted for approximately 45% of the total world stock market capitalization.

Question 6

One year ago,you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today,the stock is worth $34.60 per share. What is the total amount of your dividend income to date from this investment?
A) $0.40
B) $1.60
C) $2.10
D) $2.50
E) $3.70

Accepted Answer

The stock pays quarterly dividends of $.40 per share, so in one year (4 quarters), you would have received $1.60 in dividends.

Question 7

You purchased 200 shares of stock at a price of $36.72 per share. Over the last year,you have received total dividend income of $322. What is the dividend yield?
A) 3.2%
B) 4.4%
C) 6.8%
D) 9.2%
E) 11.4%

Accepted Answer

Dividend yield is calculated by dividing the total dividend income by the total cost of the investment. In this case, the total cost of the investment is 200 * $36.72 = $7,344. 
Dividend yield = ($322 / $7,344) * 100% = 4.4% 
Therefore, the answer is choice B, which is 4.4%.

Question 8

In predicting the expected future return of the market,one of the dangers is that:
A) the past is not indicative of the future.
B) the past period measured is too short to get a reasonable estimate of the future.
C) the equity premium does not include the premium on debt.
D) the past is not indicative of the future and the past period measured is too short to get a reasonable estimate of the future.
E) the past is not indicative of the future and the equity premium does not include the premium on debt.

Accepted Answer

Both options A and B are potential dangers when predicting future market returns, as the past may not accurately reflect future performance and shorter time periods may not provide enough data for reliable estimates. Therefore, option D is the best choice as it encompasses both of these concerns. Option C is not as relevant to the danger of predicting future market returns. Option E also includes the concern about the equity premium, but it does not cover the possibility that the past may not be indicative of the future.

Question 9

One year ago,you purchased a stock at a price of $32 a share. Today,you sold the stock and realized a total return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock?
A) 1.25%
B) 3.75%
C) 6.25%
D) 18.75%
E) 21.25%

Accepted Answer

The answer of One year ago,you purchased a stock at...

Question 10

Which country has the lowest stock market risk premium?
A) Denmark
B) Belgium
C) Switzerland
D) Spain
E) Norway

Accepted Answer

The answer of Which country has the lowest stock market...

Question 11

The variance of returns is computed by dividing the sum of the:
A) squared deviations by the number of returns minus one.
B) average returns by the number of returns minus one.
C) average returns by the number of returns plus one.
D) squared deviations by the average rate of return.
E) squared deviations by the number of returns plus onE.

Accepted Answer

The variance of returns is calculated by taking the sum of the squared deviations from the expected return, dividing by the number of returns minus one. This equation gives an unbiased estimate of the population variance.

Question 12

In estimating the future equity risk premium,it is important to include assumptions about:
A) the historical distribution of returns on derivative securities.
B) the future risk environment.
C) the amount of risk aversion of future investors.
D) the historical distribution of returns on derivative securities and the future risk environment.
E) the future risk environment and the amount of risk aversion of future investors.

Accepted Answer

The future equity risk premium depends on the future risk environment and the amount of risk aversion of future investors. The historical distribution of returns on derivative securities can provide some information, but it may not be a good predictor of future equity risk.

Question 13

A capital gain occurs when:
A) the selling price is less than the purchase price.
B) the purchase price is less than the selling price.
C) there is no dividend paid.
D) there is no income component of return.
E) never, as they cannot exist.

Accepted Answer

A capital gain occurs when the selling price is greater than the purchase price, resulting in a profit for the investor. Therefore, choice B "the purchase price is less than the selling price" is the correct answer.

Question 14

A year ago,you purchased 300 shares of IXC Technologies,Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today,you sold all of your shares for $28.14 per share. What is your total dollar return on this investment?
A) $5,703
B) $5,733
C) $5,753
D) $5,763
E) $5,853

Accepted Answer

First, we need to calculate the total cost of purchasing the 300 shares:

300 shares * $9.03 per share = $2,709

Next, we need to calculate the total amount of dividends received:

300 shares * $0.10 per share = $30

To calculate the total dollar return, we need to subtract the total cost from the total proceeds:

300 shares * $28.14 per share = $8,442

Total dollar return = $8,442 - $2,709 + $30 = $5,763

Therefore, the correct answer is (D) $5,763.

Question 15

Six months ago,you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today,you sold all of your shares for $45.13 per share. What is the total amount of your capital gains on this investment?
A) $1.24
B) $1.64
C) $40.00
D) $124.00
E) $164.00

Accepted Answer

The capital gain is calculated as the difference between the selling price and the purchase price, multiplied by the number of shares. ($45.13 - $43.89) * 100 = $124.00.

Question 16

Winslow,Inc. stock is currently selling for $40 a share. The stock has a dividend yield of 3.8%. How much dividend income will you receive per year if you purchase 500 shares of this stock?
A) $152
B) $190
C) $329
D) $760
E) $1,053

Accepted Answer

The dividend income per share is calculated by multiplying the stock price by the dividend yield: $40 * 3.8% = $1.52 per share. For 500 shares, the total dividend income is 500 * $1.52 = $760.

Question 17

Capital market history shows us that the average return relationship from lowest to highest between securities is:
A) inflation, corporate bonds, Treasuries, small company stocks, large company stocks.
B) Treasury bills, inflation, small company stocks, large company stocks.
C) Treasury bills, corporate bonds, government bonds, large common stocks, small company stocks.
D) Treasury bills, government bonds, corporate bonds, large common stocks, small company stocks.
E) There is no ordering.

Accepted Answer

Treasury bills typically have the lowest return, followed by government bonds, corporate bonds, large common stocks, and small company stocks, which have historically had the highest return. This ordering is consistent with the risk-return tradeoff, meaning that higher returns generally come with higher risks.

Question 18

The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant,then:
A) the capital gains yield will decrease.
B) the capital gains yield will increase.
C) the dividend yield will increase.
D) the dividend yield will also remain constant.
E) neither the capital gains yield nor the dividend yield will changE.

Accepted Answer

When the dividend per share increases and the stock price remains constant, the dividend yield will increase. The dividend yield is calculated by dividing the annual dividend per share by the current stock price. The capital gains yield, on the other hand, reflects the change in the stock price and is not affected by the increase in dividend per share.

Question 19

The risk premium is computed by ______ the average return for the investment.
A) subtracting the inflation rate from
B) adding the inflation rate to
C) subtracting the average return on the U.S. Treasury bill from
D) adding the average return on the U.S. Treasury bill to
E) subtracting the average return on long-term government bonds from

Accepted Answer

The risk premium is the additional return that an investor demands for accepting additional risk. It is computed by subtracting the average return on the U.S. Treasury bill (a low-risk investment) from the average return for the investment in question. This difference represents the additional compensation required for taking on additional risk.

Question 20

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.
A) overestimate; overestimate
B) overestimate; underestimate
C) underestimate; overestimate
D) underestimate; underestimate
E) accurately; accurately

Accepted Answer

The arithmetic average tends to overestimate long-term returns because it does not account for compounding, while the geometric average, which accounts for compounding, tends to underestimate short-term returns.

Quiz 10: Risk and Return: Lessons From Market History

The dollar value of the world stock market capitalization,from largest to smallest is:

How much of total world stock market capitalization is from the United States in 2011?

One year ago,you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today,the stock is worth $34.60 per share. What is the total amount of your dividend income to date from this investment?

You purchased 200 shares of stock at a price of $36.72 per share. Over the last year,you have received total dividend income of $322. What is the dividend yield?

In predicting the expected future return of the market,one of the dangers is that:

One year ago,you purchased a stock at a price of $32 a share. Today,you sold the stock and realized a total return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock?

Which country has the lowest stock market risk premium?

The variance of returns is computed by dividing the sum of the:

In estimating the future equity risk premium,it is important to include assumptions about:

A capital gain occurs when:

A year ago,you purchased 300 shares of IXC Technologies,Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today,you sold all of your shares for $28.14 per share. What is your total dollar return on this investment?

Six months ago,you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today,you sold all of your shares for $45.13 per share. What is the total amount of your capital gains on this investment?

Winslow,Inc. stock is currently selling for $40 a share. The stock has a dividend yield of 3.8%. How much dividend income will you receive per year if you purchase 500 shares of this stock?

Capital market history shows us that the average return relationship from lowest to highest between securities is:

The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant,then:

The risk premium is computed by ______ the average return for the investment.

Estimates using the arithmetic average will probably tend to _ values over the long-term while estimates using the geometric average will probably tend to _ values over the short-term.