Deck 10: Investment Returns and Aggregate Measures of Stock Markets
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Deck 10: Investment Returns and Aggregate Measures of Stock Markets
1
With dollar-cost averaging, the investor purchases more securities when their prices rise.
False
2
Averaging down will prove to be profitable only if the price of the stock subsequently rises.
True
3
The rate of return on a stock considers the price change but not dividend income.
False
4
Historical studies of investment returns suggest that the stocks of small companies generate higher returns than the stocks of larger companies.
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5
Movements in stock prices are often illustrated using relative (percentage)price changes instead of absolute price changes.
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6
Comparisons of stock performance should use percentage changes instead of absolute price changes.
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7
Aggregate securities prices may be measured by using value-weighted or geometric averages.
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8
The Dow Jones industrial and utility averages include a relatively small number of stocks.
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9
Dollar-cost averaging is achieved by periodic, equal dollar investments.
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10
Bond averages that are expressed in percentages are not comparable to the S&P 500.
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11
Stock indices do not consider taxes on capital gains.
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12
Studies of investments returns (e.g., the Ibbotson Associates studies of investment returns)determined that large-cap stocks in the S&P earned higher returns than the smaller companies.
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13
Indices of Nasdaq stocks tend to be less volatile than the S&P 500 index.
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14
The Russell 3000 is a broad-based measure of bond prices.
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15
Realized returns should include both dividends and price changes.
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16
Studies of investment returns suggest that investors can expect to earn at least 15 percent annually.
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17
Aggregate measures of stock prices include dividend income.
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18
If a stock increased from $25 to $50 in five years, the annual rate of return was 20 percent.
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19
The S&P 500 stock index is value-weighted.
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20
Averaging down may result in the investor sending good money after bad.
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21
The Wilshire 5000 stock index is more broad based than the S&P 500 stock index.
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22
If a stock rose from $10 to $30 over ten years, the annual rate of return
A)was 20 percent
B)was greater than 20 percent
C)was less than 20 percent
D)cannot be determined
A)was 20 percent
B)was greater than 20 percent
C)was less than 20 percent
D)cannot be determined
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23
The Standard & Poor's 500 stock index illustrates
A)a value-weighted index
B)a simple average
C)a geometric index
D)an exponential index
A)a value-weighted index
B)a simple average
C)a geometric index
D)an exponential index
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24
Over time, holding period returns tend to overstate the true annualized rate of return.
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25
Studies of realized rates of return assume that Dividend income is not reinvested.
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26
Movements in individual stock prices tend to be
A)positively correlated
B)positively correlated with inflation
C)negatively correlated
D)positively correlated with changes in interest rates
A)positively correlated
B)positively correlated with inflation
C)negatively correlated
D)positively correlated with changes in interest rates
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27
a. Given the following information concerning three stocks, construct a simple average, a value-weighted average, and a geometric average.
Stock Price Shares Outstanding
A $10 1,000,000
B $14 3,000,000
C $21 10,000,000
b. What are averages if each price rises to $11, $17, and $35, respectively?
c. What is the percentage increase in each average?
Stock Price Shares Outstanding
A $10 1,000,000
B $14 3,000,000
C $21 10,000,000
b. What are averages if each price rises to $11, $17, and $35, respectively?
c. What is the percentage increase in each average?
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28
An investment's internal rate of return equates
A)dividend payments and capital gains
B)cash outflows and subsequent cash inflows
C)initial cash outflow and the sale price
D)dividend payments and the investment's cost
A)dividend payments and capital gains
B)cash outflows and subsequent cash inflows
C)initial cash outflow and the sale price
D)dividend payments and the investment's cost
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29
You bought a stock for $28.29 that paid the following dividends
After the third year, you sold the stock for $35. What was the annual rate of return?

After the third year, you sold the stock for $35. What was the annual rate of return?
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30
The calculation of a rate of return assumes dividend income is reinvested at the current dividend yield.
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31
Dollar cost averaging is
A)periodically buying a round lot of stock
B)periodically investing a specified dollar amount in a stock
C)a means to increase the average cost basis
D)a means to insure a positive return
A)periodically buying a round lot of stock
B)periodically investing a specified dollar amount in a stock
C)a means to increase the average cost basis
D)a means to insure a positive return
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32
The Russell 1000 index
A)combines 1000 stocks and bonds
B)uses the 1000 largest Nasdaq stocks
C)is a broad measure of NYSE-listed and over-the-counter (Nasdaq)stocks
D)is a broad-based measure of bonds
A)combines 1000 stocks and bonds
B)uses the 1000 largest Nasdaq stocks
C)is a broad measure of NYSE-listed and over-the-counter (Nasdaq)stocks
D)is a broad-based measure of bonds
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33
The S&P 500 uses
A)a simple average
B)a compound average
C)a geometric average
D)a value-weighted average
A)a simple average
B)a compound average
C)a geometric average
D)a value-weighted average
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34
Holding period returns for greater than a year do not give an accurate measure of the true rate of return.
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35
Which of the following is the least broad-based measure of stock prices?
A)Nasdaq market index
B)Dow Jones industrial average
C)S&P 500 stock index
D)Russell 3000
A)Nasdaq market index
B)Dow Jones industrial average
C)S&P 500 stock index
D)Russell 3000
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36
You bought a stock for $20 and sold it for $59.72 after six years. What was the annual rate of return?
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37
The S&P 500 stock index is more sensitive to changes in the prices of small stocks than the stocks of large companies.
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38
To determine the realized return on an investment, the investor needs to know
1. income received
2. the cost of an investment
3. the sale price of the investment
A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above
1. income received
2. the cost of an investment
3. the sale price of the investment
A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above
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39
A strategy of averaging down will be profitable if
A)the price of the stock continues to fall
B)the firm pays more dividends
C)the firm retains earnings
D)the price of the stock subsequently rises
A)the price of the stock continues to fall
B)the firm pays more dividends
C)the firm retains earnings
D)the price of the stock subsequently rises
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40
Historical studies of rates of return on large stocks suggest
A)the average return is about 6.4 percent annually
B)over a period of years, the rate approximates 9-10 percent
C)equity investors rarely sustain losses
D)dividends account for over half the return
A)the average return is about 6.4 percent annually
B)over a period of years, the rate approximates 9-10 percent
C)equity investors rarely sustain losses
D)dividends account for over half the return
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41
The market consists of the following stocks. Their prices and number of shares are as follows:
Stock Price Number of Shares Outstanding
A $10 100,000
B 20 10,000
C 30 200,000
D 40 50,000
a. The price of Stock C doubles to $60. What is the percentage increase in the market if a S&P 500 type of measure of the market (value-weighted average)is used?
b. Repeat question (a)but use a Value Line type of measure of the market (i.e., a geometric average)to determine the percentage increase.
c. Suppose the price of stock B doubled instead of stock C. How would the market have fared using the aggregate measures employed in (a)and (b)? Why are your answers different?
Stock Price Number of Shares Outstanding
A $10 100,000
B 20 10,000
C 30 200,000
D 40 50,000
a. The price of Stock C doubles to $60. What is the percentage increase in the market if a S&P 500 type of measure of the market (value-weighted average)is used?
b. Repeat question (a)but use a Value Line type of measure of the market (i.e., a geometric average)to determine the percentage increase.
c. Suppose the price of stock B doubled instead of stock C. How would the market have fared using the aggregate measures employed in (a)and (b)? Why are your answers different?
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42
You sold 200 shares of DOG short for $24. After three years you closed your position at $17. DOG paid an annual dividend of $1, what was the annualized (compound)return on the trade?
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