Deck 10: Risk and Return Lessons From Market History

Question 1

You are comparing the returns on 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 consists of more dividend-paying stocks 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.

Answer 1

Portfolio I has a lower standard deviation than Portfolio II.

Question 2

Assume today is December 31,2012.Approximately how long has it been since the annual rate of inflation as measured by the Consumer Price Index has been negative?

A)Less than 10 years
B)Between 10 and 30 years
C)Between 30 and 50 years
D)Between 50 and 70 years
E)Over 70 years

Answer 2

Between 50 and 70 years

Question 3

The return earned in an average year over a multi-year period is called the _____ average return.

A)arithmetic
B)standard
C)variant
D)geometric
E)real

Answer 3

arithmetic

Question 4

Suppose a portfolio had an arithmetic average return of 8 percent for a 4-year period.Which one of these statements must be true regarding this portfolio for the period?

A)At least one of the four years produced an annual rate of return of 8 percent.
B)If the standard deviation of the portfolio is greater than zero,then the geometric average portfolio return is less than 8 percent.
C)The standard deviation of the portfolio must be lower than the standard deviation of a comparable portfolio that had an arithmetic average return of 9 percent.
D)If the standard deviation of the portfolio is zero,then the geometric average return must also be zero.
E)The holding period return must be less than 8 percent.

Question 5

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.

Question 6

Which one of these statements must be correct?

A)Long-term expected rates of return are inversely related to risk premium.
B)The lower the risk premium the higher a security's average rate of return.
C)Risk premium is defined as the nominal rate of return minus the rate of inflation.
D)One security can have both a higher standard deviation and a lower risk premium than another security for the same historical period.
E)A security with a standard deviation of 9.9 percent for a stated historical period will have a higher average rate of return for that period than a security with a standard deviation of 9.6 percent.

Question 7

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)Zero percent
B)Less than .5 percent
C)Between .5 and 1 percent
D)Between 1 and 2 percent
E)More than 2 percent

Question 8

Which one of the following years had the lowest rate of return for the S&P 500 Index?

A)2011
B)2008
C)2001
D)2009
E)2010

Question 9

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

A)geometric average return.
B)inflation premium.
C)risk premium.
D)time premium.
E)arithmetic average return.

Question 10

Which one of these statements is correct?

A)Treasury bills outperformed inflation every year during the period 1925-2012.
B)Small-company stocks outperformed large-company stocks every year during the period 1925-2012.
C)On an annual basis,small-company stocks had more consistent rates of return than did large-company stocks for the period 1925-2012.
D)The holding period return on large-company stocks was approximately half that of small-company stocks for the period 1925-2012.
E)During the 1930's (Great Depression),long-term government bonds produced a relatively stable rate of return relative to large-company stocks.

Question 11

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

A)United States
B)United Kingdom
C)Italy
D)Sweden
E)Denmark

Question 12

For our historical comparison purposes,how are large-company stocks defined?

A)Stocks of the lowest 20 percent of the firms listed on the NYSE based on market capitalization
B)Stocks with average annual returns that exceed the average annual return of the U.S.Treasury bill
C)Any firm that has been listed on the NYSE for 40 years or more
D)Stocks of firms included in the S&P 500 composite index
E)Stocks of firms that employ over 5,000 employees

Question 13

Over the period 1925-2012,stocks outperformed bonds by a wide margin.What conclusion should you draw from this performance?

A)Stocks will have a higher rate of return than bonds in any given year.
B)Investors should only purchase stocks.
C)Any stock you select will outperform a bond over the long-term.
D)On an annual basis,stock returns will exceed the rate of inflation but bond returns may or may not.
E)Stocks are riskier than bonds.

Question 14

The capital gains yield plus the dividend yield on a security is called the:

A)geometric return.
B)total return.
C)average period return.
D)variance of returns.
E)current yield.

Question 15

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.

Question 16

Which one of the following values cannot be negative?

A)Capital gain,P_{t + 1} - P_t
B)Total dollar return
C)Holding period return
D)Dividend yield
E)Total return,R_{t + 1}

Question 17

Based on the period of 1926 through 2012,which category of securities has outperformed all of the other categories?

A)Long-term corporate bonds
B)U.S.Treasury bills
C)Small-company stocks
D)Large-company stocks
E)Long-term government bonds

Question 18

The average compound return earned per year over a multi-year period is called the _____ average return.

A)real
B)standard
C)arithmetic
D)variant
E)geometric

Question 19

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

A)gamma
B)Poisson
C)bi-modal
D)normal
E)uniform

Question 20

Which one of these stocks is most apt to have the highest (least negative)rate of return assuming that each stock has a negative total return for the period?

A)High-dividend,high standard deviation stock
B)No dividend,high standard deviation stock
C)High-dividend,low standard deviation stock
D)Low-dividend,high standard deviation stock
E)Low-dividend,low standard deviation stock

Question 21

Over the period of 1926 to 2012,small-company stocks had an average return of:

A)18.2 percent.
B)15.9 percent.
C)12.8 percent.
D)16.5 percent.
E)17.4 percent.

Question 22

The variance of returns 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.

Question 23

Which one of these statements correctly reflects historical history from 1926 through 2012?

A)Large-company stocks have never returned more than 40 percent in a single year.
B)In 2012,the rate of inflation was slightly higher than the average inflation rate for the period of 1926 through 2012.
C)U.S.Treasury bills have had a positive rate of return every single year.
D)The return on U.S.Treasury bills has exceeded the rate of inflation every single year.
E)The rate of inflation as measured by the consumer price index has been positive every single year.

Question 24

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2012?

A)Long-term corporate bonds
B)Long-term government bonds
C)Small-company stocks
D)Large-company stocks
E)U.S.Treasury bills

Question 25

On average,for the period 1926 through 2012:

A)the real rate of return on U.S.Treasury bills has been negative.
B)small-company stocks have underperformed large-company stocks.
C)the risk premium on long-term corporate bonds has exceeded the risk premium on long-term government bonds.
D)intermediate-term government bonds have produced higher returns than long-term government bonds.
E)the risk premium on large-company stocks has exceeded the risk premium on small-company stocks.

Question 26

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2012? Rank from highest volatility to lowest volatility.

A)Small-company stocks,large-company stocks,long-term government bonds
B)Large-company stocks,U.S.Treasury bills,long-term government bonds
C)Small-company stocks,long-term government bonds,large-company stocks
D)Long-term corporate bonds,large-company stocks,U.S.Treasury bills
E)Small-company stocks,long-term corporate bonds,large-company stocks

Question 27

Which of the following statements concerning the standard deviation are correct?
I.The greater the standard deviation,the lower the risk.
II.The standard deviation is a measure of volatility.
III.The higher the standard deviation,the less certain the rate of return in any one given year.
IV.The higher the standard deviation,the higher the expected return.

A)I and III only
B)II,III,and IV only
C)I,III,and IV only
D)I,II,and III only
E)I,II,III,and IV

Question 28

Assume you are analyzing stock market risk premiums over time.Which one of these would be the computation to use to compute the standard error of those premiums?

A)Variance^1/2
B)Variance/(Number of observations - 1)
C)Σ Deviations²
D)Σ Deviations²/(Number of observations - 1)
E)SD(R)/Number of observations^1/2

Question 29

This morning you purchased one share of stock for $14.The stock pays $.20 per share each quarter as a dividend.What must the stock price be one year from now if you want to earn a total return of 12 percent for the year?

A)$14.54
B)$14.88
C)$15.01
D)$13.12
E)$13.46

Question 30

Based on historical performance from 1900-2010 for a sampling of 17 countries,the annual stock market risk premium was approximately:

A)3 percent.
B)5 percent
C)7 percent.
D)9 percent.
E)2 percent.

Question 31

Which one of these categories of securities has had the lowest volatility of returns over the period of 1926 through 2012?

A)Large-company stocks
B)U.S.Treasury bills
C)Long-term corporate bonds
D)Small-company stocks
E)Long-term government bonds

Question 32

When forecasting the future,the arithmetic average historical return is probably too ____ of an estimate for longer periods and the geometric average historical return is:

A)high;probably too low.
B)high: probably accurate.
C)low: probably too high.
D)low: probably also too low.
E)high;probably also too high.

Question 33

Winter's just declared that it is increasing its annual dividend from $.82 a share to $.85 a share.If the stock price should remain constant,then:

A)the capital gains yield would decrease.
B)the capital gains yield would increase.
C)the dividend yield would remain constant.
D)the dividend yield would increase.
E)neither the capital gains yield nor the dividend yield would change.

Question 34

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

A)Decrease greater than 15 percent
B)Decrease between 5 and 15 percent
C)Change between -5 and +5 percent
D)Increase between 5 and 15 percent
E)Increase greater than 15 percent

Question 35

Which one of these statements correctly reflects historical history from 1926 through 2012?

A)Large-company stocks had the widest distribution of returns for the period.
B)The rate of return in any given year is a good estimate of the rate of return for the following year.
C)For small-company stocks,both the worst annual rate of return and the best annual rate of return occurred during the period 1929-1939.
D)The annual rate of return on U.S.Treasury bills has never exceeded 8 percent.
E)The standard deviation of returns for U.S.Treasury bills was zero percent for the period.

Question 36

Which one of these ratios best represents the size of the United States stock market as compared to the world stock market?

A)1/5
B)1/4
C)1/3
D)1/2
E)3/4

Question 37

The risk premium is computed by ______ the average rate of return for an investment.

A)subtracting the inflation rate from
B)adding the inflation rate to
C)subtracting the average return on U.S.Treasury bills from
D)adding the average return on U.S.Treasury bills to
E)subtracting the average return on long-term government bonds from

Question 38

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

Question 39

Over the long-term,which one of the following is a correct statement concerning risk premium?

A)The lower the volatility of returns,the greater the risk premium.
B)Stocks tend to have a higher risk premium than bonds.
C)The lower the rate of return,the greater the risk premium.
D)The risk premium does not affect the rate of return.
E)The risk premium varies by the same percentage rate as the inflation rate.

Question 40

Which of the following statements are correct concerning the variance of the annual returns on an investment?
I.The larger the variance,the more the actual returns differ from the average return.
II.The larger the variance,the larger the standard deviation.
III.The larger the variance,the greater the risk of the investment.
IV.The larger the variance,the higher the expected return.

A)I and III only
B)II,III,and IV only
C)I,III,and IV only
D)I,II,and III only
E)I,II,III,and IV

Question 41

One year ago,Barkley's stock sold for $20 a share.During last year,Barkley's paid $1.40 per share in dividends and saw its stock price increase by five percent for the year.Today,the firm announced that it will pay $1.43 per share in dividends this year.What do you know with certainty about the performance of Barkley's stock for this year?

A)The total rate of return will be higher this year than it was last year.
B)The dividend yield for this year will be higher than it was last year.
C)The capital gains yield will be positive.
D)The dividend yield for this year will be lower than it was last year.
E)The total rate of return will be lower this year than it was last year.

Question 42

Eight months ago,Isaac purchased 50 shares of stock at a price of $65.90 a share.To date,he has received two quarterly dividends of $1.03 a share each.If he sells his shares at the current price of $52.80 a share,what will be his total percentage return?

A)-11.27%
B)-9.38%
C)-16.75%
D)-20.91%
E)-13.40%

Question 43

A stock returned 13 percent,18 percent,-16 percent and -1 percent annually for the past four years.Based on this information,what is the 99.74 percent probability range for any one given year?

A)-8.4 to 11.7%
B)-16.1 to 22.6%
C)-24.5 to 34.3%
D)-42.4 to 49.4%
E)-54.8 to 61.3%

Question 44

A stock has an expected rate of return of 14.2 percent and a standard deviation of 23.4 percent.Which one of the following best describes the probability that this stock will lose more than 1/3 of its value in any one year?

A)Less than .1%
B)Approximately 2.25%
C)Approximately 1%
D)Less than .26%
E)Approximately 4.60%

Question 45

A stock had annual returns of 8 percent,-2 percent,4 percent,and 20 percent over the past four years.What is the standard deviation of these returns?

A)16.33%
B)16.09%
C)7.10%
D)9.29%
E)7.99%

Question 46

Today,you sold 200 shares of SLG stock for a total of $10,018.Last year,you purchased the stock for $52.30 a share and received $326 in dividends.What is your total rate of return on this investment?

A)-1.11%
B)-.82%
C)-.37%
D)-7.34%
E)-1.16%

Question 47

A stock had returns of 19 percent,12 percent,-29 percent,35 percent,and 4 percent annually for the past five years.Based on these returns,what is the approximate probability that this stock will earn at least 30 percent in any one given year?

A)8%
B)2%
C)16%
D)5%
E).5%

Question 48

What are the arithmetic and geometric average returns for a stock with annual returns of 11 percent,14 percent,-2 percent and 6 percent?

A)8.25%;8.15%
B)8.25%;7.89%
C)7.25%;7.37%
D)7.25%;8.15%
E)7.25%;7.08%

Question 49

One year ago,Ceegee purchased 200 shares of stock at a price of $18.97 per share.Over the last year,she received total dividend income of $164.What is the dividend yield?

A)3.20%
B)4.32%
C)8.22%
D)8.65%
E)9.14%

Question 50

A stock had returns of 7 percent,15 percent,and -1 percent for the past three years.Based on these returns,what is the probability that this stock will earn at least 15 percent in any one given year?

A)8.00%
B)2.28%
C)15.87%
D)4.56%
E)31.74%

Question 51

A stock had returns of 14 percent,3 percent,9 percent,and -12 percent annually for the past four years.What is the mean and variance of these returns?

A)3.50%;.0069
B)3.50%;.0127
C)3.50%;.0381
D)9.50%;.0100
E)9.50%;.0033

Question 52

What are the arithmetic and geometric average returns for a stock with annual returns of 4 percent,12 percent,-8 percent and 9 percent?

A)8.25%;6.25%
B)4.25%;4.89%
C)4.25%;3.96%
D)8.25%;7.89%
E)8.25%;8.21%

Question 53

Six months ago,you purchased 2,400 shares of stock for $21.10 a share.Today,you sold the shares for $22.20 a share.What is your total dollar return on this investment if you received a dividend of $.40 a share?

A)$1,680
B)-$1,420
C)-$1,680
D)$3,600
E)$3,840

Question 54

A stock had returns of 12 percent,6 percent,14 percent,and -3 percent annually for the past four years.What is the mean and standard deviation of these returns?

A)8.75%;9.11%
B)8.75%;10.29%
C)7.25%;7.63%
D)7.25%;13.22%
E)7.25%;11.08%

Question 55

Winslow stock is currently selling for $48 a share.The stock has a dividend yield of 3.1 percent.How much dividend income will you receive per year if you purchase 600 shares of this stock?

A)$148.80
B)$390.47
C)$892.80
D)$639.05
E)$1,860.00

Question 56

One year ago,you purchased a stock at a price of $28.50 a share.Today,you sold the stock and realized a total return of 20.4 percent.Your capital gain was $5.20 a share.What was your dividend yield on this stock?

A)1.25%
B)1.85%
C)2.15%
D)1.75%
E)1.35%

Question 57

Deltona stock sold for $38.60 a share one year ago and pays an annual dividend of $1.55.What does the stock price need to be today for the annual capital gain to be 7.5 percent?

A)$39.95
B)$40.08
C)$41.50
D)$41.63
E)$43.18

Question 58

One year ago,Stacey purchased 300 shares of IXC Tek stock at a price of $11.23 per share.The stock pays an annual dividend of $.23 per share.Today,Stacey sold all of her shares for $16.20 per share.What is her total dollar return on this investment?

A)$1,703
B)$1,560
C)$1,422
D)$1,389
E)$1,491

Question 59

You just sold 250 shares of stock for $37.75 a share.One year ago,you purchased the stock for $40.50 a share and have received dividends totaling $2.64 per share.What is your capital gain in dollars?

A)-$687.50
B)-$975.50
C)$687.50
D)$975.50
E)$1,347.50

Question 60

A stock had returns of 7 percent,12 percent,-10 percent,and 17 percent annually over the past four years.What is the geometric average return for this time period?

A)4.52%
B)5.78%
C)5.99%
D)7.30%
E)8.21%

Question 61

Assume the return on large-company stocks is currently 11.5 percent.The risk premium on large-company stocks is 8.6 percent and the inflation rate is 2.4 percent.What is the current risk-free rate of return?

A)2.9%
B)7.4%
C)8.4%
D)10.6%
E)12.6%

Question 62

Suppose you own a risky asset with an expected return of 16.3 percent and a standard deviation of 31.3 percent.If the returns are normally distributed,the approximate probability of losing 15 percent or more in a single year is ____ percent.

A)2.28
B)4.56
C)15.87
D)31.74
E).26

Question 63

Assume a $1 investment in a stock 36 years ago is now worth $54.82.What is the geometric average return for the period?

A)10.52%
B)11.76%
C)12.08%
D)12.67%
E)14.03%

Question 64

How does the payment of a dividend affect the total return on a stock?

Question 65

Assume you purchased 400 shares of stock for $20 a share,sold the stock for $8,392 and received a total of $550 in dividends.What was total dollar capital gain and total dollar return?

A)$392;$942
B)$392;$158
C)$550;$942
D)$550;$158
E)$392;$550

Question 66

Assume that for a 10-year period inflation averaged 2.8 percent,U.S.Treasury bills returned 3.3 percent,and long-term corporate bonds earned 5.9 percent.What was the real rate of return on long-term corporate bonds for the period?

A)2.8%
B)3.1%
C)9.5%
D)9.9%
E)-.2%

Question 67

Assume a $1 investment in a stock 65 years ago is now worth $211.46.What is the geometric average return for the period?

A)8.59%
B)9.16%
C)9.58%
D)10.24%
E)11.06%

Question 68

The annual returns for KLO stock for the last three years are 11.2 percent,16.4 percent and 3.8 percent.Assuming no dividends were paid,what was the 3-year holding period return?

A)10.47%
B)15.70%
C)31.40%
D)34.36%
E)36.52%

Question 69

The price of a stock for Years 1 through 4 was $23.19,$24.00,$23.18,and $24.86,respectively.The stock paid dividends per share of $.23,$.24,and $.25 for Years 2 through 4,respectively.What is the geometric average rate of return for the period?

A)3.2%
B)3.4%
C)3.6%
D)3.8%
E)4.0%

Question 70

Exo shares are currently selling for $25.75 each.You bought 200 shares one year ago at $24 a share and received dividend payments of $1.60 a share.What is the percentage capital gain for the period?

A)4.17%
B)7.29%
C)10.24%
D)13.21%
E)10.42%

Question 71

One year ago,Ted purchased 100 shares of stock at $18.79 a share.Today,he received a total of $130 in dividends and sold his shares for a total of $1,211.What was his total rate of return?

A)8.69%
B)7.94%
C)-44.43%
D)-42.47%
E)-28.63%

Question 72

The return pattern on your favorite stock has been 9 percent,8 percent,-2 percent,15 percent,and 21 percent over the last five years.What is the stock's arithmetic average return and holding period return?

A)10.20%;8.24%
B)10.20%;60.53%
C)8.24%;10.20%
D)8.24%;60.53%
E)8.25;48.62%

Question 73

Alpha shares are currently selling for $28.09 a share.Alice bought 200 shares one year ago at a price of $25.20 a share and received total dividend payments of $1.25 a share.What was her total rate of return?

A)11.47%
B)16.43%
C)14.74%
D)6.51%
E)5.84%

Question 74

Kurt's Toy Co.has had total annual returns for the past five years of -5 percent,8 percent,-3 percent,20 percent,and 12 percent.What is the 5-year holding period return?

A)42.03%
B)5.50%
C)6.40%
D)33.76%
E)36.75%

Question 75

Assume inflation averaged 3.2 percent during a period in which U.S.Treasury bills earned 4.3 percent.What was the average real rate of return on large-company stocks if the risk premium on those stocks was 7.4 percent for the period?

A)8.5%
B)3.2%
C).1%
D)7.5%
E)14.9%

Question 76

Assume the market portfolio of common stocks earned 14.1 percent in one year while U.S.Treasury bills earned 4.4 percent and inflation averaged 4.6 percent.What was the market risk premium?

A)5.1%
B)9.7%
C)9.9%
D)13.9%
E)14.3%

Question 77

For the period 1926-2012 U.S.Treasury bills had an average return of 3.6 percent and inflation averaged 3.1 percent.U.S.Treasury bills had an approximate real rate of return of _____ percent and a risk premium of _____ percent.

A)0;.5
B)0;-.5
C).5;0
D)-.5;0
E).5;-.5

Question 78

The arithmetic average return on your portfolio for the past five years was 8.4 percent.Assume you earned -6 percent,25 percent,10 percent,and 6 percent for four of those five years.What rate of return did you earn in the fifth year?

A)5.0%
B)6.0%
C)7.5%
D)7.0%
E)10.0%

Question 79

For the period 1926-2012 small-company stocks had an average return of 16.5 percent.U.S.Treasury bills returned 3.6 percent and inflation averaged 3.1 percent.Small-company stocks had an approximate real rate of return of _____ percent and a risk premium of _____ percent.

A)12.9;13.4
B)12.9;9.8
C)13.4;12.9
D)13.4;9.8
E)9.8;12.9

Question 80

A stock earned a real average arithmetic rate of return of 5.65 percent for a 4-year period.During that period inflation averaged 3.6 percent while U.S.Treasury bills returned 4.2 percent.Assume the stock had annual nominal returns of 8 percent,13 percent and 12 percent for three of the four years.What nominal rate of return did the stock earn in the fourth year?

A)3.25%
B)3.65%
C)3.26%
D)4.00%
E)4.25%