Question 1

How did long-term U.S.Treasury bonds perform in 2008?
A)Decreased by more than 15 percent
B)Decreased between 5 and 15 percent
C)Changed between -5 and +5 percent
D)Increased between 5 and 15 percent
E)Increased more than 15 percent

Accepted Answer

In 2008, during the financial crisis, investors sought the safety of U.S. Treasury bonds, leading to a significant increase in their prices and a corresponding decrease in yields. Long-term U.S. Treasury bonds increased by more than 15 percent as a result.

Question 2

If you examine the U.S.stock market risk premium by extending the 1926 to 2015 time period backwards in time to 1802 (given the available information),the risk premium
A)decreases to 5.2 percent.
B)increases to 7.6 percent.
C)decreases to 3.9 percent.
D)increases to 7.1 percent.
E)decreases to 6.3 percent.

Accepted Answer

The risk premium decreases to 5.2 percent when the time period is extended backwards to 1802.

Question 3

You are comparing the returns of two portfolios for a 10-year period.Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II.Given this,what do you know with certainty?
A)Portfolio I has a lower standard deviation than Portfolio II.
B)Portfolio I is riskier than Portfolio II.
C)Portfolio II has less total risk than Portfolio I.
D)Portfolio I will outperform Portfolio II over the next 10 years.
E)Portfolio II consists of more individual stocks than Portfolio I.

Accepted Answer

Lower dispersion of returns indicates lower standard deviation, so Portfolio I has a lower standard deviation than Portfolio II. However, we cannot say which portfolio is riskier or which one will outperform over the next 10 years based solely on the information given. Total risk cannot be determined without knowing the standard deviation and other risk factors for both portfolios. The number of individual stocks in each portfolio is also not given.

Question 4

A symmetric,bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the ________ distribution.
A)gamma
B)Poisson
C)bimodal
D)normal
E)uniform

Accepted Answer

The normal distribution is a symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation. Gamma distribution is not symmetric, Poisson distribution is not bell-shaped, bimodal distribution has two peaks instead of a single bell shape, and uniform distribution is not bell-shaped.

Question 5

Based on historical performance from 1900-2010,the U.S.equity risk premium was approximately
A)6.1 percent.
B)5.4 percent.
C)7.2 percent.
D)9.0 percent.
E)8.3 percent.

Accepted Answer

Based on historical performance from 1900-2010, the U.S. equity risk premium was approximately 7.2 percent. This is calculated as the average annual return of the S&P 500 minus the risk-free rate (typically the 10-year Treasury bond rate).

Question 6

How is the Sharpe ratio defined as it applies to security returns?
A)Average return / Risk premium
B)Standard deviation / Risk premium
C)Average return / Standard deviation
D)Risk premium / Average return
E)Risk premium / Standard deviation

Accepted Answer

The Sharpe ratio is defined as the risk premium (average return minus the risk-free rate) divided by the standard deviation of the security's returns.

Question 7

The variance of returns for a portfolio of stocks 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 for a portfolio of stocks is computed by dividing the sum of the squared deviations by (the number of returns minus one) in order to account for the degrees of freedom. This is known as the sample variance formula.

Question 8

The average squared difference between the actual return and the average return is called the
A)excess return.
B)variance.
C)standard deviation.
D)risk premium.
E)volatility return.

Accepted Answer

The average squared difference between the actual return and the average return is referred to as variance. Variance measures the dispersion of returns from their average, thus indicating the volatility or risk of an investment.

Question 9

What percentage of the time should you expect to earn an annual rate of return that is within two standard deviations of the mean?
A)100%
B)95%
C)68%
D)99%
E)75%

Accepted Answer

The answer of What percentage of the time should you...

Question 10

The standard deviation for a set of stock returns can be calculated as the
A)variance squared.
B)positive square root of the variance.
C)positive square root of the average return.
D)average return divided by N minus one,where N is the number of returns.
E)average squared difference between the actual return and the average return.

Accepted Answer

The standard deviation is the positive square root of the variance.

Question 11

Past performance
A)does not guarantee future performance.
B)is totally unrelated to future performance.
C)guarantees future performance.
D)is a perfect representation of future performance for the same length of time.
E)will be duplicated in the near future.

Accepted Answer

Past performance is not a guarantee of future performance because market conditions and other factors may change, affecting the outcome of investments. While past performance may provide helpful information for making investment decisions, it should not be relied upon as the sole indicator of future returns.

Question 12

Given a normal distribution,assume you want to earn a rate of return that plots more than three standard deviations above the mean.What is your probability of earning such a return in any one year?
A).14 percent or less
B).15 to .25 percent
C).26 to .50 percent
D).51 to 1 percent
E)More than 1 percent

Accepted Answer

Assuming a normal distribution, approximately 99.7% of the data falls within three standard deviations of the mean. Therefore, the probability of earning a rate of return that plots more than three standard deviations above the mean is only 0.3% (100% - 99.7% = 0.3%). Choice A is the only option that represents a probability of 0.14% or less, making it the best choice.

Question 13

During the 2008 financial crisis,the Icelandic stock exchange temporarily halted trading.What was the reaction of that market when trading resumed a few days later?
A)Increase in excess of 50 percent
B)Increase between 25 and 50 percent
C)Change between -25 and +25 percent
D)Decrease between 25 and 50 percent
E)Decrease in excess of 75 percent

Accepted Answer

The Icelandic stock exchange experienced a steep decline during the 2008 financial crisis, and when trading resumed a few days later, the market saw a dramatic decrease of over 75 percent.

Question 14

For the period 1926 to 2015,large-company stocks had a standard deviation of
A)20 percent.
B)6 percent.
C)13 percent.
D)27 percent.
E)10 percent.

Accepted Answer

The standard deviation of large-company stocks for the period 1926 to 2015 was approximately 20 percent, reflecting the volatility of stock returns over that time frame.

Question 15

A review of annualized equity risk premiums by country for the period 1900 to 2010 shows that
A)country with the lowest standard deviation had the lowest equity risk premium.
B)the standard deviation of returns was consistent among countries.
C)the sharpe ratio for each country is equal.
D)the United States had the highest risk premium of the countries listed.
E)Sharpe ratios vary significantly among countries.

Accepted Answer

Sharpe ratios vary significantly among countries due to differences in risk and return profiles, reflecting varying levels of compensation for risk across different markets.

Question 16

Which one of these countries had the highest average stock market risk premium for the period 1900 to 2010?
A)United States
B)United Kingdom
C)Italy
D)Sweden
E)Denmark

Accepted Answer

Italy had the highest average stock market risk premium for the period 1900 to 2010. This is because the risk premium is influenced by the country's economic volatility, and Italy experienced significant economic fluctuations during this period, which contributed to a higher risk premium compared to the more stable economies of the United States, United Kingdom, Sweden, and Denmark.

Question 17

Given a set of returns,the wider the distribution of those returns,the
A)higher the number of those returns.
B)lower the average rate of return.
C)lower the variance.
D)higher the standard deviation.
E)lower the volatility.

Accepted Answer

The standard deviation measures the spread or variability of the returns around the average return. Therefore, the wider the distribution of returns (i.e., the greater the range between the highest and lowest returns), the higher the standard deviation of those returns. Choices A, B and E are incorrect because they do not accurately characterize the relationship between the distribution of returns and other statistical measures such as the number of returns, the average return, or volatility. Choice C is also incorrect because the variance is directly proportional to the standard deviation, meaning that a wider distribution of returns would result in a higher variance, not a lower variance.

Question 18

As of 2015,the United States represents about ________ percent of the total world stock market capitalization.
A)53
B)67
C)27
D)38
E)19

Accepted Answer

The answer of As of 2015,the United States represents about...

Question 19

The higher the Sharpe ratio,the
A)greater the total risk.
B)greater the return per unit of risk.
C)more the security resembles the overall market.
D)greater the risk per unit of return.
E)lower the level of total risk.

Accepted Answer

The Sharpe ratio measures the excess return (return earned above the risk-free rate) per unit of risk (measured by standard deviation). Therefore, a higher Sharpe ratio indicates a higher return per unit of risk, which is desirable for investors.

Question 20

Which set of characteristics should you prefer in a stock if you desire the highest (least negative)rate of return assuming that you will earn a negative total return for the period?
A)High-dividend,high standard deviation
B)No dividend,high standard deviation
C)High-dividend,low standard deviation
D)Low-dividend,high standard deviation
E)Low-dividend,low standard deviation

Accepted Answer

In times of negative total return periods, stocks with high dividends and low standard deviation are preferred as they provide a steady income while having a lower risk of price fluctuation. High dividends indicate a strong financial position of the company and the low standard deviation implies a lower risk of price fluctuation, which is beneficial during a period of negative returns.

Quiz 10: Risk and Return: Lessons From Market History

How did long-term U.S.Treasury bonds perform in 2008?

If you examine the U.S.stock market risk premium by extending the 1926 to 2015 time period backwards in time to 1802 (given the available information) ,the risk premium

You are comparing the returns of two portfolios for a 10-year period.Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II.Given this,what do you know with certainty?

A symmetric,bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the ________ distribution.

Based on historical performance from 1900-2010,the U.S.equity risk premium was approximately

How is the Sharpe ratio defined as it applies to security returns?

The variance of returns for a portfolio of stocks is computed by dividing the sum of the

The average squared difference between the actual return and the average return is called the

What percentage of the time should you expect to earn an annual rate of return that is within two standard deviations of the mean?

The standard deviation for a set of stock returns can be calculated as the

Past performance

Given a normal distribution,assume you want to earn a rate of return that plots more than three standard deviations above the mean.What is your probability of earning such a return in any one year?

During the 2008 financial crisis,the Icelandic stock exchange temporarily halted trading.What was the reaction of that market when trading resumed a few days later?

For the period 1926 to 2015,large-company stocks had a standard deviation of

A review of annualized equity risk premiums by country for the period 1900 to 2010 shows that

Which one of these countries had the highest average stock market risk premium for the period 1900 to 2010?

Given a set of returns,the wider the distribution of those returns,the

As of 2015,the United States represents about ________ percent of the total world stock market capitalization.

The higher the Sharpe ratio,the

Which set of characteristics should you prefer in a stock if you desire the highest (least negative) rate of return assuming that you will earn a negative total return for the period?