Question 1

Use the table for the question(s) below.
Consider the following realized annual returns:
 
-The average annual return on IBM from 1996 to 2005 is closest to:

Accepted Answer

B) R_annual= 11ea7e5a_6e58_7a2b_9a0a_77459b4ee962_TB1623_11 = 11ea7e5a_6e58_7a2c_9a0a_eb83c9645ac0_TB1623_11 = 11ea7e5a_6e58_7a2d_9a0a_0dbcae682eb7_TB1623_11 = 16.45%

Question 2

Use the table for the question(s) below.
Consider the following realized annual returns:
 
-The average annual return on the S&P 500 from 1996 to 2005 is closest to:

Accepted Answer

D) R_annual= 11ea7e5a_6e58_2c08_9a0a_ad73ea33485a_TB1623_11 = 11ea7e5a_6e58_2c09_9a0a_b31667f3bd8d_TB1623_11 = 11ea7e5a_6e58_531a_9a0a_3fcb26ec4a5d_TB1623_11 = 8.82%

Question 3

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The standard error of your estimate of the expect return is closest to:

Accepted Answer

B) R_annual= 11ea7e5a_6e5a_9d28_9a0a_87e029ede3e5_TB1623_11 = 11ea7e5a_6e5a_c439_9a0a_e36203c3780b_TB1623_11 = 16.45% 11ea7e5a_6e5a_c43a_9a0a_49cbd868c298_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.9907165 / 9 = 0.1100796 Standard deviation = 11ea7e5a_6e5a_c43b_9a0a_e7248991001f_TB1623_11 = 11ea7e5a_6e5a_c43c_9a0a_ed6dfd3a89e7_TB1623_11 = 0.3317825 Standard error = Standard Deviation / 11ea7e5a_6e5a_eb4d_9a0a_ff7794bee452_TB1623_11 = 0.3317825 / 11ea7e5a_6e5a_eb4e_9a0a_d91627deb0d3_TB1623_11 = .1049 or 10.49%

Question 4

The standard deviation of the returns on the S&P 500 from 1996 to 2005 is closest to:

Accepted Answer

A) R_annual= 11ea7e5a_6e59_3d85_9a0a_35fb04a5d963_TB1623_11 = 11ea7e5a_6e59_6496_9a0a_cf3b223483d3_TB1623_11 = 11ea7e5a_6e59_6497_9a0a_c103acbac5dc_TB1623_11 = 8.82% 11ea7e5a_6e59_6498_9a0a_174bc4f0ecb4_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.3405116 / 9 = 0.0378346 Standard deviation = 11ea7e5a_6e59_8ba9_9a0a_61f46f0c5a31_TB1623_11 = 11ea7e5a_6e59_8baa_9a0a_5d4410471fb3_TB1623_11 = 0.1945112

Question 5

Which of the following statements is false?

Accepted Answer

B) When focusing on the returns of a single security, it is common practice to assume that all dividends are immediately reinvested and used to purchase additional shares of the same stock or security.

Question 6

Use the table for the question(s) below.
Consider the following realized annual returns:
 
-The variance of the returns on IBM from 1996 to 2005 is closest to:

Accepted Answer

C) R_annual= 11ea7e5a_6e58_ef62_9a0a_5544b128439a_TB1623_11 = 11ea7e5a_6e59_1673_9a0a_052e9d8b7865_TB1623_11 = 16.45% 11ea7e5a_6e59_1674_9a0a_f9f31e4f66ce_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.9907165 / 9 = 0.1100796

Question 7

Which of the following investment opportunities provides highest average annual return?

Accepted Answer

The S&P/TSX Composite Index provides the highest average annual return among the given investment opportunities. Historical data shows that the TSX index has consistently outperformed the other options over the long term.

Question 8

Which of the following investment opportunities provides lowest average annual return?

Accepted Answer

Canadian Treasury Bills typically provide the lowest average annual return compared to other investment opportunities listed.

Question 9

Use the table for the question(s) below.
Consider the following realized annual returns:
 
-The variance of the returns on the S&P 500 from 1996 to 2005 is closest to:

Accepted Answer

D) R_annual= 11ea7e5a_6e58_c84e_9a0a_41cfecb9ed8f_TB1623_11 = 11ea7e5a_6e58_c84f_9a0a_1ff267f7ad69_TB1623_11 = 11ea7e5a_6e58_c850_9a0a_710ccfe3d139_TB1623_11 = 8.82% 11ea7e5a_6e58_ef61_9a0a_550a5ab46aff_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.3405116 / 9 = 0.0378346

Question 10

The standard deviation of the returns on IBM from 1996 to 2005 is closest to:

Accepted Answer

A) R_annual= 11ea7e5a_6e59_b2bb_9a0a_59a2446afcf9_TB1623_11 = 11ea7e5a_6e59_d9cc_9a0a_b78fbb3601dd_TB1623_11 = 16.45% 11ea7e5a_6e59_d9cd_9a0a_f7ed139b5d97_TB1623_00 Variance = SUM of( R - R)²/ (T - 1) = 0.9907165 / 9 = 0.1100796 Standard deviation = 11ea7e5a_6e59_d9ce_9a0a_f74153a0578c_TB1623_11 = 11ea7e5a_6e5a_00df_9a0a_75e8e668a69d_TB1623_11 = 0.3317825

Question 11

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as

Accepted Answer

Since the annual realized return is the return earned over the course of one full year, we need to calculate the compounded return over all four quarters. Option B calculates the total return assuming the dividends are not reinvested but rather added to the principal. Option D adds the quarterly returns without accounting for the compounding effect of reinvesting dividends. Option C is the correct choice as it takes into account the compounding effect by subtracting 1 from the product of (1 + quarterly returns) raised to the power of 4.

Question 12

Which of the following statements is false?

Accepted Answer

C) The geometric average return will always be below the arithmetic average return and the difference grows with the volatility of the annual returns.

Question 13

Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your dividend yield for this period is closest to:

Accepted Answer

C) = div / P₀ = .10 / 14.64 = .0068

Question 14

Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500.The 95% confidence interval for your estimate of the expect return is closest to:

Accepted Answer

D) R_annual= 11ea7e5a_6e5b_125f_9a0a_0fc5f8467871_TB1623_11 = 11ea7e5a_6e5b_1260_9a0a_6d898e0832f2_TB1623_11 = 8.82% 11ea7e5a_6e5b_1261_9a0a_b768fb7b33a0_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.3405116 / 9 = 0.0378346 Standard deviation = 11ea7e5a_6e5b_3972_9a0a_f7387bf9a7b6_TB1623_11 = 11ea7e5a_6e5b_3973_9a0a_1dd7adc758c1_TB1623_11 = 0.1945112 Standard error = Standard Deviation / 11ea7e5a_6e5b_3974_9a0a_95d0392226ee_TB1623_11 = 0.1945112 / 11ea7e5a_6e5b_3975_9a0a_8135c755a933_TB1623_11 = .061510 or 6.15% 95% Confidence Interval = mean return + or - 2 standard errors, so lower bound = .0882 - 2 × .0615 = -0.0348 upper bound = .0882 + 2 × .0615 =0.2112

Question 15

Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it at the closing price on December 30,2005.Your realized annual return for the year 2005 is closest to:

Accepted Answer

A)
 11ea7e5a_6e57_dde6_9a0a_e5071207c86f_TB1623_00 The last column in the table contains the cumulative product of (1 + returns)

Question 16

Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your total return rate (yield)for this period is closest to:

Accepted Answer

D) = (P₁+ D₁ - P₀)/ P₀ = (13.35 + .10 - 14.64) / 14.64 = -.08128

Question 17

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The 95% confidence interval for your estimate of the expect return is closest to:

Accepted Answer

B) R_annual= 11ea7e5a_6e5b_6086_9a0a_9fde872679a9_TB1623_11 = 11ea7e5a_6e5b_8797_9a0a_25dc273cc1ec_TB1623_11 = 16.45% 11ea7e5a_6e5b_8798_9a0a_adee25f7340b_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.9907165 / 9 = 0.1100796 Standard deviation = 11ea7e5a_6e5b_8799_9a0a_87d6db20e18b_TB1623_11 = 11ea7e5a_6e5b_879a_9a0a_69bc664c58be_TB1623_11 = 0.3317825 Standard error = Standard Deviation / 11ea7e5a_6e5b_aeab_9a0a_bd131cb80c9c_TB1623_11 = 0.3317825 / 11ea7e5a_6e5b_aeac_9a0a_61616fafb9b5_TB1623_11 = .1049 or 10.49% 95% Confidence Interval = mean return + or - 2 standard errors, so lower bound = .1645 - 2 × .1049= -0.045 upper bound = .1645 + 2 × .1049 = 0.374

Question 18

Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500.The standard error of your estimate of the expect return is closest to:

Accepted Answer

D) R_annual= 11ea7e5a_6e5a_4f00_9a0a_9d09ef8336c3_TB1623_11 = 11ea7e5a_6e5a_4f01_9a0a_95320b00b58c_TB1623_11 = 11ea7e5a_6e5a_4f02_9a0a_b5aaafdd49cd_TB1623_11 = 8.82% 11ea7e5a_6e5a_4f03_9a0a_7baaafef36c9_TB1623_00 Variance = SUM of (R - R)²/ (T - 1) = 0.3405116 / 9 = 0.0378346 Standard deviation = 11ea7e5a_6e5a_7614_9a0a_c7523c98405b_TB1623_11 = 11ea7e5a_6e5a_7615_9a0a_69e80ab5ca09_TB1623_11 = 0.1945112 Standard error = Standard Deviation 11ea7e5a_6e5a_7616_9a0a_91a82c499a3a_TB1623_11 = 0.1945112 / 11ea7e5a_6e5a_7617_9a0a_dda509b6115c_TB1623_11 = .061510 or 6.15%

Question 19

Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your capital gains rate (yield)for this period is closest to:

Accepted Answer

C) = (P₁ - P₀) / P₀= (13.35 - 14.64) / 14.64 = -.088115

Question 20

Which of the following statements is false?

Accepted Answer

B) The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus two standard errors.

Quiz 10: Capital Markets and the Pricing of Risk

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return on IBM from 1996 to 2005 is closest to:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return on the S&P 500 from 1996 to 2005 is closest to:

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The standard error of your estimate of the expect return is closest to:

The standard deviation of the returns on the S&P 500 from 1996 to 2005 is closest to:

Which of the following statements is false?

Use the table for the question(s) below. Consider the following realized annual returns: -The variance of the returns on IBM from 1996 to 2005 is closest to:

Which of the following investment opportunities provides highest average annual return?

Which of the following investment opportunities provides lowest average annual return?

Use the table for the question(s) below. Consider the following realized annual returns: -The variance of the returns on the S&P 500 from 1996 to 2005 is closest to:

The standard deviation of the returns on IBM from 1996 to 2005 is closest to:

If a stock pays dividends at the end of each quarter,with realized returns of R1,R2,R3,and R4 each quarter,then the annual realized return is calculated as

Which of the following statements is false?

Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500.The 95% confidence interval for your estimate of the expect return is closest to:

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The 95% confidence interval for your estimate of the expect return is closest to:

Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500.The standard error of your estimate of the expect return is closest to:

Which of the following statements is false?

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as