Question 1

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?

Accepted Answer

C) $114 / (1 + 0.05) = $108.57

Question 2

Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year?

Accepted Answer

A) (1 + 0.15) × (1 + 0.15) × (1 - 0.15) × (1 - 0.15) = 0.9555;
0.9555 - 1 = -0.0445 or -4.45%

Question 3

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment?

Accepted Answer

B) $(66 + 0.41) - 79 = -12.59; -12.59/79 = -15.94%

Question 4

On average, stocks have delivered higher returns than bonds in the long run.

Accepted Answer

Over a long period of time, typically 10 years or more, stocks have historically provided higher returns than bonds. However, this does not mean that stocks always outperform bonds, as the performance of each asset class can vary depending on the specific economic conditions and market environment.

Question 5

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment?

Accepted Answer

C) $(66 + 0.38) - 59 = 7.38;
7.38 / 59 = 12.51%

Question 6

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment?

Accepted Answer

C) $(65 + 0.63) - 60 = 5.63;
5.63 / 60 = 9.38%

Question 7

Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment?

Accepted Answer

B) Dividend yield = $0.53 / $94 = 0.57%; cap gain = $94 - $93 = $1;
capital gains yield $1 / $93 = 1.08%

Question 8

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year?

Accepted Answer

A) 11eaabab_c088_a81a_b90e_171336989da2_TB5536_11 0.9854 - 1 = -1.46%

Question 9

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95. What was your dividend yield and capital gains yield on the investment?

Accepted Answer

A) $2 / $100 = 2%; -$5 / $100 = -5%

Question 10

Stocks with high returns are expected to have ________.

Accepted Answer

Stocks with high returns are typically associated with higher variability or volatility. This is because higher returns usually come with higher risk, and higher risk can lead to larger fluctuations in stock prices. Thus, stocks with high returns are expected to have high variability.

Question 11

In the United States over the long term, small stocks have provided the highest return followed by the large stocks in the S&P 500.

Accepted Answer

This statement is true. Studies have shown that small cap stocks, as represented by indices such as the Russell 2000, have historically provided higher returns than large cap stocks such as those in the S&P 500. However, it is important to note that past performance does not guarantee future results and that individual stocks can vary greatly in performance.

Question 12

Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Greg's return on his investment?

Accepted Answer

A) $(11 - 88) = -$77; -$77 / $88 = -87.50%

Question 13

Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.

Accepted Answer

Historically, stocks have offered higher returns than Treasury bills, reflecting the greater risk associated with stock investments, which also leads to higher fluctuations in their values.

Question 14

Rational investors ________ fluctuations in the value of their investments.

Accepted Answer

Rational investors are averse to fluctuations in the value of their investments because they prefer stability and predictability over uncertainty and risk.

Question 15

Which of the following investments had the largest fluctuations overall return over the past eighty years?

Accepted Answer

Small stocks have historically had the largest fluctuations in overall return compared to the other options listed. While they may have the potential for higher returns, they also come with greater risk and volatility.

Question 16

Investors demand a higher return for investments that have larger fluctuations in values because ________.

Accepted Answer

Investors typically demand a higher return for investments with larger fluctuations in value because they are averse to risk. The larger fluctuations represent higher risk, and investors need to be compensated for taking on that additional risk.

Question 17

Which of the following investments offered the highest overall return over the past eighty years?

Accepted Answer

Small stocks have historically offered the highest overall return over the past eighty years when compared to Treasury bills, the S&P 500, and corporate bonds. This is due to their higher risk compared to the other options, which typically leads to higher potential rewards over the long term.

Question 18

Which of the following investments offered the lowest overall return over the past eighty years?

Accepted Answer

Treasury bills are considered one of the safest investments as they are backed by the government and have a low risk of default. However, this safety comes with a tradeoff in terms of returns. Over the past eighty years, Treasury bills have offered the lowest overall return compared to other investment options.

Question 19

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?

Accepted Answer

D) Dividend yield = $2 / $100 = 2%; cap gains yield = $100 - $100 = 0

Question 20

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed?

Accepted Answer

A) $34 - $23 = $11; $11 / $23 = 47.83%

Quiz 11: Risk and Return in Capital Markets