Question 1

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 3.1 percent. What was your real rate of return for the period?

Accepted Answer

The answer of You earned 26.3 percent on your investments...

Question 2

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

Accepted Answer

To find the variance, first calculate the average return, then find the squared deviations from the mean, sum them up, and divide by the number of observations. The variance is approximately 0.081504.

Question 3

One year ago, Neal purchased 3,600 shares of Franklin 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 1.7 percent?

Accepted Answer

The answer of One year ago, Neal purchased 3,600 shares...

Question 4

Jones Footwear pays a constant annual dividend. Last year, the dividend yield was 2.8 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

The answer of Jones Footwear pays a constant annual dividend....

Question 5

Katie earned a 2.7 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

The answer of Katie earned a 2.7 percent real rate...

Question 6

One year ago, Theresa 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 $0.25 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

The answer of One year ago, Theresa purchased 600 shares...

Question 7

Aztec Movers pays a constant annual dividend of $1.55 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

The answer of Aztec Movers pays a constant annual dividend...

Question 8

Last year, Thomas 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, 6.3 percent, and 3.9 percent, respectively. What was the nominal risk premium on Oil Town's stock for the year?

Accepted Answer

The answer of Last year, Thomas invested $38,000 in Oil...

Question 9

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 $40.18 a 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 ($40.18 - $36.48) / $36.48 = 0.1014 or 10.14 percent.

Question 10

The stock of Turner United is priced at $46 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

To find the amount of the next dividend per share, we need to use the formula for dividend yield: dividend yield = annual dividend / stock price

We can rearrange this formula to solve for the annual dividend: annual dividend = dividend yield x stock price

Plugging in the given values, we get: 
annual dividend = 0.021 x 46 = $0.966

So the answer is C) $0.966.

Question 11

Last year, Rita earned 11.6 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 rate of return = (1 + nominal rate) / (1 + inflation rate) - 1
Real rate of return = (1 + 0.116) / (1 + 0.031) - 1
Real rate of return = 0.0824 or 8.24% (rounded to two decimal places)

Question 12

You expect the inflation rate to be 2.9 percent and the U.S. Treasury bill yield to be 3.7 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 rate of return = Inflation rate + Real rate of return + Risk premium
Real rate of return = Treasury bill yield - Inflation rate = 3.7% - 2.9% = 0.8%
Nominal rate of return = 2.9% + 0.8% + 12.6% = 16.3%

Question 13

Hilltop Garage 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 8 percent and you just sold all of your shares. What is your total nominal return on this investment?

Accepted Answer

The dividend one year ago was $12 * 2% = $0.24. The required return today is 8%, so the price today is $0.24 / 0.08 = $3. The nominal return is (($3 + $0.24) - $12) / $12 = -73%.

Question 14

The Triangle Store pays a constant dividend. Last year, the dividend yield was 5.4 percent when the stock was selling for $18 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

The dividend amount is constant, so we can calculate it using last year's yield: Dividend = 5.4% of $18 = $0.972. For the current yield of 3.8%, the stock price should be: $0.972 / 0.038 = $25.58.

Question 15

One year ago, you purchased 400 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

The total dollar return includes both the capital gain and the dividends received. The capital gain is (28.30 - 12) * 400 = $6,520. The dividends received are 0.22 * 400 = $88. The total return is $6,520 + $88 = $6,608.

Question 16

One year ago, you purchased a 6 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

The answer of One year ago, you purchased a 6...

Question 17

One year ago, Steven purchased 4,200 shares of KNF stock for $177,072. Today, he sold those shares for $48.10 a share. What is the capital gains yield on this investment if the dividend yield is 3.3 percent?

Accepted Answer

First, we need to calculate the total dividend Steven received.

Dividend = (Number of shares) x (Dividend yield) x (Price per share)

Dividend = 4,200 x 0.033 x $48.10 = $6,383.40

Next, we need to calculate the total proceeds from the sale of the shares.

Proceeds = (Number of shares) x (Price per share)

Proceeds = 4,200 x $48.10 = $202,020

The capital gains yield is calculated as follows:

Capital gains yield = (Proceeds - Cost) / Cost

where cost is what Steven paid for the shares, including any brokerage fees.

Cost = $177,072

Capital gains yield = ($202,020 - $177,072) / $177,072 = 0.1409 or 14.09%

Therefore, the correct answer is D) 14.09 percent.

Question 18

Assume large-company stocks returned 11.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.2 percent. What was the average nominal risk-free rate of return for those 75 years?

Accepted Answer

The average nominal risk-free rate of return is the inflation rate plus the risk premium. So, 3.2% + 7.9% = 11.1%.

Question 19

If the financial markets are semi-strong form efficient, then:

Accepted Answer

The answer of If the financial markets are semi-strong form...

Question 20

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

Quiz 10: Some Lessons From Capital Market History