Question 1

Windsor stock has produced returns of 22.6 percent,18.7 percent,11.3 percent,-19.8 percent,and 2.4 percent over the past five years,respectively.What is the variance of these returns?

Accepted Answer

Average return = (0.226 + 0.187 + 0.113 - 0.198 + 0.024)/5 = 0.0704σ² = [(0.226 - 0.0704)² + (0.187 - 0.0704)² + (0.113 - 0.0704)² + (-0.198 - 0.0704)² + (0.024 - 0.0704)²]/(5 - 1) = 0.028453

Question 2

The Bermuda Triangle Store pays a constant dividend.Last year,the dividend yield was 5.4 percent when the stock was selling for $15 a share.What must the stock price be today if the market currently requires a 3.8 percent dividend yield on this stock?

Accepted Answer

D = 0.054 × $15 = $0.81P₀ = $0.81/0.038 = $21.32

Question 3

Assume large-company stocks returned 12.8 percent on average over the past 75 years.The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6 percent.What was the average nominal risk-free rate of return for those 75 years?

Accepted Answer

Nominal risk-free rate = 12.8 percent - 7.9 percent = 4.9 percent

Question 4

Hercules Movers pays a constant annual dividend of $1.75 per share on its stock.Last year at this time,the market rate of return on this stock was 14.8 percent.Today,the market rate has fallen to 11.2 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

P_-1 = $1.75/0.148 = $11.8243P₀ = $1.75/0.112 = $15.6350Capital gains yield = ($15.6250 - $11.8243)/$11.8243 = 32.14 percent

Question 5

Rocky Top pays a constant annual dividend.One year ago,when you purchased shares of that stock at $12 a share,the dividend yield was 2 percent.Over this past year,the inflation rate has been 2.6 percent.Today,the required return on this stock is 9 percent and you just sold all of your shares.What is your total nominal return on this investment? Round your answer to the nearest whole percentage.

Accepted Answer

Dividend = 0.02 × $12 = $0.24P₀ = $0.24/0.09 = $2.67Nominal return = ($2.67 - $12 + $0.24)/$12 = -75.78 percent

Question 6

Sarah earned a 2.9 percent real rate of return on her investments for the past year.During that time,the risk-free rate was 4.1 percent and the inflation rate was 3.6 percent.What was her nominal rate of return?

Accepted Answer

Nominal rate = (1.029 × 1.036) - 1 = 6.60 percent

Question 7

One year ago,you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par.Today,you sold this bond for 99.8 percent of par.What is your total dollar return on this investment?

Accepted Answer

Total dollar return = (0.998 × $1,000) - (1.012 × $1,000) + (0.05 × $1,000) = $36

Question 8

One year ago,you purchased 500 shares of stock for $12 a share.The stock pays $0.22 a share in dividends each year.Today,you sold your shares for $28.30 a share.What is your total dollar return on this investment?

Accepted Answer

Total dollar return = 500 × ($28.30 - $12 + $0.22) = $8,260

Question 9

One year ago,Peyton purchased 3,600 shares of Broncos stock for $101,124.Today,he sold those shares for $26.60 a share.What is the total return on this investment if the dividend yield is 1.9 percent?

Accepted Answer

Purchase price = $101,124/3,600 shares = $28.09 a shareTotal return = [($26.60 - $28.09)/$28.09] + 0.019 = -3.40 percent

Question 10

Over the past five years,a stock returned 8.3 percent,-32.5 percent,-2.2 percent,46.9 percent,and 11.8 percent,respectively.What is the variance of these returns?

Accepted Answer

Average return = (0.083 - 0.325 - 0.022 + 0.469 + 0.118)/5 = 0.0646σ² = [(0.083 - 0.0646)² + (-0.325 - 0.0646)² + (-0.022 - 0.0646)² + (0.469 - 0.0646)² + (0.118 - 0.0646)²]/(5 - 1) = 0.081504

Question 11

You earned 26.3 percent on your investments for a time period when the risk-free rate was 3.8 percent and the inflation rate was 4.0 percent.What was your real rate of return for the period?

Accepted Answer

Real return = (1.263/1.040) - 1 = 21.44 percent

Question 12

Last year,Paul invested $38,000 in Oil Town stock,$11,000 in long-term government bonds,and $8,000 in U.S.Treasury bills.Over the course of the year,he earned returns of 12.1 percent,7.2 percent,and 4.1 percent,respectively.What was the nominal risk premium on Oil Town's stock for the year?

Accepted Answer

Nominal risk premium = 12.1 percent - 4.1 percent = 8.0 percent

Question 13

The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1 percent.The firm pays constant annual dividends.What is the amount of the next dividend per share?

Accepted Answer

D = 0.021 × $40 = $0.84

Question 14

If the financial markets are semistrong form efficient,then:

Accepted Answer

The answer of If the financial markets are semistrong form...

Question 15

One year ago,Debra purchased 4,200 shares of KNF stock for $177,072.Today,she sold those shares for $48.10 a share.What is the capital gains yield on this investment if the dividend yield is 4.1 percent?

Accepted Answer

Purchase price = $177,072/4,200 shares = $42.16 a shareCapital gains yield = ($48.50 - $42.16)/$42.16 = 15.04 percent

Question 16

Cox Footwear pays a constant annual dividend.Last year,the dividend yield was 2.5 percent when the stock was selling for $26 a share.What is the current price of the stock if the current dividend yield is 3.1 percent?

Accepted Answer

D = 0.025 × $26 = $0.65P₀ = $0.65/0.031 = $20.97

Question 17

One year ago,you bought a stock for $36.48 a share.You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share.What is the capital gains yield on this investment?

Accepted Answer

Capital gains yield = ($41.18 - $36.48)/$36.48 = 12.88 percent

Question 18

Last year,Isaac earned 10.6 percent on her investments while U.S.Treasury bills yielded 3.8 percent and the inflation rate was 3.1 percent.What real rate of return did she earn on her investments last year?

Accepted Answer

Real return = (1.106/1.031) - 1 = 7.27 percent

Question 19

One year ago,LaTresa purchased 600 shares of Outland Co.stock for $3,600.The stock does not pay any regular dividends but it did pay a special dividend of $0.30 a share last week.This morning,she sold her shares for $7.25 a share.What was the total return on this investment?

Accepted Answer

Purchase price = $3,600/600 shares = $6 a shareTotal return = ($7.25 - $6 + $0.30)/$6 = 25.83 percent

Question 20

You expect the inflation rate to be 3.8 percent and the U.S.Treasury bill yield to be 3.9 percent for the next year.The risk premium on small-company stocks is 12.6 percent.What nominal rate of return do you expect to earn on small-company stocks next year?

Accepted Answer

Nominal return on small-company stocks = 3.9 percent + 12.6 percent = 16.50 percent

Quiz 10: Some Lessons From Capital Market History