Deck 1: A Brief History of Risk and Return

Question 1

The total percentage return on an equity investment typically has two components known as ___________ and ___________.

A) Principal and interest.
B) Capital gains yield and dividend yield.
C) Arithmetic yield and geometric yield.
D) Dollar gain and capital gains.
E) Dividends and cash payments.

Answer 1

B

Question 2

Capital gains yield is equal to:

A) (P_t - P_{t + 1})/P_{t + 1}
B) D_{t + 1}/P_t
C) (P_{t + 1} - P_t)/P_t
D) (P_t - P_{t + 1})/P_t
E) P_t/(P_{t + 1} - P_t)

Answer 2

C

Question 3

Rate of return is expressed on a ____________ basis.

A) Percentage
B) Increase
C) Equity
D) Absolute
E) Gain

Answer 3

A

Question 4

The arithmetic average return is the return earned in an average year over a multi-year period. For calculation you:

A) Add up all the returns and divide by the number of observations minus one.
B) Add one to each return, multiply these values, find the 1/n root, and subtract one.
C) Subtract the lowest return from the highest return.
D) Add up all the returns and divide by the number of observations.
E) Find the return that is exactly in the middle of the highest and lowest return.

Question 5

Why is the rate of return on a risk free asset considered to represent the "time value of money"?

A) It represents the return for forgoing the use of our money without bearing risk.
B) It has an efficient risk premium when compared to other risk free investments.
C) The yield of the risk free investment increases proportionally with time.
D) The money from the return from your investment won't be created until the future.
E) It represents the minimum amount of time necessary to have the asset become risk free.

Question 6

The value that is equal to the ending price of a security minus the beginning price is called the:

A) Geometric return.
B) Negative dividend.
C) risk premium.
D) capital gain or loss.
E) Percentage return.

Question 7

The geometric average return is the:

A) Summation of the returns for a number of years divided by the n^th root when n equal the number of years
B) Average compound return earned per year over a multi-year period
C) Compound total return for a period of years divided by the number of years in the period
D) Return earned in an average year over a multi-year period
E) Average squared return earned in a single year

Question 8

The standard deviation is a measure of:

A) Volatility.
B) Return.
C) Performance.
D) Capital gains.
E) The risk premium.

Question 9

A company whose has 1,000,000 shares and a current stock price of $15.67 would have a market capitalization of:

A) $6,380,000
B) 6.38%
C) 15.67%
D) $15,670,000
E) $1,000,000

Question 10

The reward for bearing risk is known as the:

A) Excess return.
B) Volatility.
C) Geometric premium.
D) Risk premium.
E) Dividend yield.

Question 11

The fact that higher returns are associated with higher standard deviation is known as the:

A) Real return factor
B) Geometric relationship
C) Risk-return tradeoff
D) Market variance
E) Market capitalization

Question 12

Annual dividend yield at time (t + 1), D_{t + 1}, divided by the stock price at time t, P_t is called the:

A) Annualized rate of return
B) Capital gain
C) Total annual rate of return
D) Total dollar return
E) Dividend yield

Question 13

The risk premium is defined as the rate of return on

A) A risky asset minus the inflation rate
B) The overall market
C) A Treasury bill
D) A risky asset minus the risk-free rate
E) A risk-less investment

Question 14

The total dollar return on an equity investment is defined as:

A) All cash flows and gains from an investment, excluding any losses.
B) All cash inflows such as dividends and capital gains or losses.
C) The increase in the price of an asset.
D) Capital gains received.
E) Only the capital gains received, not including capital gains not realized.

Question 15

The variance measures the:

A) Total difference between the actual returns and the average returns
B) Average difference between the actual squared returns and the risk-free returns
C) Average squared difference between the actual returns and the risk-free returns
D) Total difference between the average returns and the risk-free returns
E) Average squared difference between the actual and the average returns

Question 16

The average compound return earned per year over a multiyear period when inflows and outflows are considered is called the:

A) total return
B) average capital gains yield
C) dollar-weighted average return.
D) arithmetic average return.
E) Percentage return.

Question 17

A company's total market capitalization is found by:

A) The quoted price of its shares divided by the number of shares in issue
B) The income stream in the future
C) The use of numbers drawn randomly from probability distributions
D) The quoted price of its shares times the number of shares in issue
E) The technique for minimizing the operating costs

Question 18

The risk-free rate that is paid as compensation for waiting is referred to as the:

A) Time value of money
B) Real rate of return
C) Total dollar return
D) Average real return
E) Financial reward

Question 19

The rate of return on an asset with no uncertainty regarding its return is known as the ___________. A typical example is the rate of return earned on a Treasury bill.

A) Risk premium.
B) Capital gains yield.
C) Risk-free rate.
D) Dividend yield.
E) Compound return.

Question 20

The dollar-weighted average return is measured by calculating the:

A) geometric average return
B) internal rate of rate
C) annual compounded average return.
D) arithmetic average return.
E) percentage return.

Question 21

The risk premium for risky stocks is the stock return:

A) Minus the risk-free rate.
B) Minus the large company stock return.
C) Minus the long-term corporate bond return.
D) Plus the risk-free rate.
E) Plus the large company stock return.

Question 22

If you want to increase the potential annual return on your investment, you probably will need to:

A) Increase your investment in bonds and lower your investment in stocks
B) Increase your investment in T-bills and lower your investment in corporate bonds
C) Reduce the standard deviation of your returns
D) Reduce the expected variability of your returns
E) Increase your portfolio's level of risk

Question 23

If you multiply the number of shares outstanding stock for a firm by the price per share, you are looking for the firm's:

A) Equity ratio
B) Total book value
C) Time value
D) Market capitalization
E) Leverage degree

Question 24

A major difference between dividends and capital gains is that:

A) Capital gains are always positive.
B) Capital gains affect the total return while dividends do not.
C) Capital gains are in increase in stock price while dividends are cash payments to stockholders.
D) Dividends affect the total return while capital gains do not.
E) Capital gains are only accounted for on an annual basis while dividends are accounted for when paid.

Question 25

The historic risk premium for equities in Canada, from 1900 to 2005, is:

A) 7.41%
B) 7.54%
C) 5.88%
D) 16.71%
E) 11.7%

Question 26

The dividend yield on a stock will be ___________, while the capital gains yield will be ___________.

A) Positive; either positive or zero
B) Positive; positive
C) Positive; negative, positive or zero
D) Positive or zero; positive or zero
E) Positive or zero; negative, positive or zero

Question 27

In Canada, the average historic return on ____________ has been slightly higher than the average historic inflation rate.

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

Question 28

To invest in any financial instruments, you would like to check their:

A) Percentage returns
B) Minimum returns
C) Maximum returns
D) Standard deviations of returns
E) All of the above

Question 29

Some investors would avoid investing in small capitalization stocks because:

A) Of the historically low risk premium.
B) Of their volatility.
C) They do not provide an adequate return.
D) Their historic return is about the same as the historic rate of inflation.
E) Investors prefer assets that are non-financial.

Question 30

Historically, T-bills as an asset class have had a ___________ level of risk and ___________ return compared to large-company stocks.

A) High; high
B) High; low
C) Low; high
D) Low; low
E) Zero; zero

Question 31

Returns that have been adjusted for inflation are called:

A) Nominal returns
B) Holding period returns
C) Total dollar returns
D) Effective returns
E) Real returns

Question 32

Which of the following is not a financial asset?

A) Stocks.
B) Real estate.
C) Bonds.
D) Options.
E) Futures.

Question 33

Which of the following is true regarding capital gains?

A) Gains must be included whenever they occur regardless the status of the investment
B) Gains have to be computed on an annual basis
C) Gains are only included when they are realized at the time the investment is sold
D) Both (A) and (B)
E) Both (B) and (C)

Question 34

In the last 25 years, US large-company stocks historically produced ____________ returns compared with the Canadian counterparts.

A) Substantially higher
B) Marginally higher
C) Identical
D) Much lower
E) Slightly lower

Question 35

For proper comparisons among investments, the best measure of return is _________ return.

A) Dollar
B) Percentage
C) capital gains
D) Dividend
E) Stock

Question 36

Which one of the following had the highest risk premium for the period 1926-2009?

A) U.S. Treasury bills
B) long-term government bonds
C) large-company stocks
D) small-company stocks
E) intermediate-term government bonds

Question 37

Which of the following is false?

A) Risky assets have a risk premium on average.
B) In general, the greater the risk, the greater the return.
C) Standard deviation is a commonly used measure of risk.
D) Risk and return have historically exhibited a direct relationship.
E) None of the above.

Question 38

Historically, the higher the risk premium, the ___________ the average return and the ___________ the standard deviation of the returns.

A) Lower; lower
B) Lower; higher
C) Higher; higher
D) Higher; lower
E) There is no relationship between the risk premium and the average return

Question 39

In 2008, which of the following would have had the best overall return in the United States?

A) A portfolio consisting of all stocks
B) A portfolio consisting of all bonds
C) A portfolio consisting of a mix of stocks and bonds
D) A portfolio that had diversified stocks
E) None of the above

Question 40

It is important to account for capital gains:

A) On an annual basis.
B) Whenever the asset is sold and the capital gain is realized.
C) Whenever dividends are paid.
D) Whenever they occur, whether or not the asset is sold.
E) If the asset incurs a loss in value.

Question 41

A stock had a price at the beginning of the year of $48.20. The end of year stock price was $43.12 and your total return was - 8.15%. What dividend did the stock pay during the year?

A) $0.87
B) $0.96
C) $1.09
D) $1.15
E) $1.23

Question 42

You purchased 500 shares of stock at a price of $86.34 and received a dividend of $0.97 per share. You sold the stock for $92.14. What was your total dollar return?

A) $2,900.00
B) $3,163.00
C) $3,385.00
D) $3,504.00
E) $3,723.00

Question 43

The Investment bubble, historically known as tulipmania easily arises when:

A) Risky investments do not always pay more than risk-free investments.
B) Market is full of speculators.
C) Investors become irrational.
D) Manic buying and selling occur.
E) All of the above.

Question 44

You have the returns for a stock over the last twenty years. Assuming the returns are different each year, you know:

A) the arithmetic return will always be larger.
B) the geometric return will always be larger.
C) the arithmetic return will be larger if there are no negative returns.
D) the geometric return will be larger if there are no negative returns.
E) it is uncertain whether the arithmetic or geometric return will be larger.

Question 45

A stock had returns of 8 percent, - 6 percent, 18 percent and 27 percent over the past four years. What was the geometric return?

A) 10.31%
B) 10.67%
C) 11.06%
D) 11.43%
E) 11.75%

Question 46

A stock has varying annual rates of return over a 10-year period and a positive geometric average return for the same period. Given this, you know the arithmetic return will be:

A) Positive but less than the geometric average return
B) Less than the geometric return and can be negative, zero or positive
C) Equal to the geometric average return
D) Either equal to or greater than the geometric average return
E) Greater than the geometric average return

Question 47

A portfolio had a value of $50,000 ten years ago. If the average annual arithmetic return was 10.2 percent, what is the ending value of the portfolio?

A) $120,406
B) $126,532
C) $132,064
D) $138,846
E) Insufficient information.

Question 48

A common measure of inflation is:

A) Small company stock returns.
B) Treasury bills.
C) The Consumer Price Index.
D) The risk-free rate.
E) The standard deviation of stocks.

Question 49

To annualize a two-year holding-period-return, you need to assume that:

A) All cash receipts in the first year are ignored in the calculation
B) All cash receipts in the first year are reinvested
C) The arithmetic average will be smaller than the geometric average
D) There are no outliners in the returns
E) Nothing

Question 50

You purchased a stock at the beginning of the year for $80.25. Your total return for the year was 10.2%, and the stock had a dividend yield of 1.8%. What was the end of year stock price?

A) $84.73
B) $85.02
C) $86.99
D) $88.44
E) $89.56

Question 51

___________ is an annualized return rate on an investment using compound interest techniques.

A) Bond equivalent yield
B) Annual market yield
C) Average percentage yield
D) Effective annual yield
E) Compounded annual yield

Question 52

The geometric return on an asset is approximately equal to the arithmetic return:

A) Plus one-half the standard deviation
B) Plus one-half the variance
C) Minus one-half the standard deviation
D) Minus one-half the variance
E) Times one-half

Question 53

You purchased 100 shares of a stock at the beginning of the year for $43.20 per share. The share price at the end of the year is $46.10 and the stock paid an annual dividend of $1.10 per share. What was your dividend yield for the year?

A) 2.23%
B) 2.39%
C) 2.55%
D) 2.67%
E) 2.81%

Question 54

You purchased 100 shares of a stock at the beginning of the year for $43.20 per share. The share price at the end of the year is $46.10 and the stock paid an annual dividend of $1.10 per share. What was your total percentage return for the year?

A) 7.16%
B) 7.73%
C) 8.68%
D) 9.26%
E) 10.39%

Question 55

A portfolio had a value of $50,000 ten years ago. If the average annual arithmetic return was 10.2 percent, what is the ending value of the portfolio?

A) $120,406
B) $126,532
C) $132,064
D) $138,846
E) Insufficient information.

Question 56

An asset has a return of 10.5 percent and a variance of 70 percent square. What range of returns would you expect to see two-thirds of the time?

A) - 73.17% to 94.17%
B) - 6.24% to 27.24%
C) - 31.2% to 51.7%
D) - 43.8% to 62.8%
E) - 59.5% to 80.5%

Question 57

The asset commonly used as the risk-free asset is:

A) Small company stocks.
B) Gold.
C) The Consumer Price Index.
D) Long-term corporate bonds.
E) Treasury bills.

Question 58

You purchased 100 shares of a stock at the beginning of the year for $43.20 per share. The share price at the end of the year is $46.10 and the stock paid an annual dividend of $1.10 per share. What was your capital-gain yield for the year?

A) 2.55%
B) 3.12%
C) 4.86%
D) 5.34%
E) 6.71%

Question 59

When we refer to the rate of return on an investment, we are generally referring to the:

A) capital gains yield
B) effective annual rate of return.
C) total percentage return.
D) dividend yield.
E) annualized dividend yield.

Question 60

You have an asset that has an arithmetic average return of 10.9 percent over the past five years. The annual returns for four years were 8%, 16%, - 9%, and 13%. What was the asset's return for the fifth year?

A) 15.6%
B) 17.8%
C) 20.7%
D) 22.8%
E) 26.5%

Question 61

You own a stock with an average historical risk premium of 6.8%. The risk-free rate next year is expected to be 4.6%. What rate of return should you expect on your stock for next year?

A) 4.60%
B) 11.38%
C) 11.87%
D) 11.40%
E) 2.20%

Question 62

A particular stock had year-end prices of $45, $43, $54, and $61 over the past four years, respectively. What was the arithmetic average return of the stock?

A) 7.90%
B) 8.52%
C) 10.04%
D) 10.67%
E) 11.37%

Question 63

A portfolio had an original value of $15,000 twenty years ago. The current value of the portfolio is $92,780. What was the geometric average return of the portfolio?

A) 8.63%
B) 9.54%
C) 10.81%
D) 11.16%
E) 11.87%

Question 64

An asset had returns of 14%, 26%, - 13%, 8%, and 12% over the past five years. What was the arithmetic average return of the asset?

A) 8.94%
B) 9.40%
C) 10.05%
D) 10.63%
E) 11.75%

Question 65

You plan to buy a stock and hold it for one year. You expect the stock price to be $68 per share in one year, and the stock will pay an annual dividend of $1.25. If you want a 14 percent return, what is the maximum amount you are willing to pay for the stock today?

A) $58.32
B) $59.65
C) $60.75
D) $62.12
E) $68.00

Question 66

An asset had returns of 14%, 26%, - 13%, 8%, and 12% over the past five years. What was the standard deviation of the returns?

A) 11.34%
B) 12.70%
C) 14.21%
D) 16.22%
E) 18.74%

Question 67

An asset has annual returns of 11 percent, 17 percent, - 21 percent, 3 percent and 18 percent. What is the standard deviation?

A) 11.05%
B) 12.30%
C) 14.31%
D) 15.12%
E) 16.02%

Question 68

You find a stock with returns of 14.2%, - 10.1%, 8.7%, 29.7%, and 18.2%. The risk-free rate over this period was 6.4%, 6.8%, 5.2%, 4.4% and 5.3%. What was the arithmetic average risk premium?

A) 5.57%
B) 5.86%
C) 6.52%
D) 7.01%
E) 7.34%

Question 69

You own a stock with an average historical risk premium of 7.4 percent. The risk-free rate next year will be 4.1 percent. What do you expect the stock return to be next year?

A) 4.1%
B) 7.4%
C) 9.8%
D) 10.6%
E) 11.5%

Question 70

An asset has annual returns of 11 percent, 17 percent, - 21 percent, 3 percent and 18 percent. What is the variance?

A) .01210
B) .01329
C) .02568
D) .02748
E) .01964

Question 71

An asset has annual returns of 14 percent, 8 percent, - 6 percent, 27 percent and 18 percent. What is the geometric average return?

A) 11.64%
B) 12.20%
C) 13.05%
D) 14.16%
E) 15.25%

Question 72

A stock has had returns of - 8 percent, 11 percent, 12 percent, 7 percent and 9 percent over the past five years. What is the variance of returns for this stock during the last five years?

A) .019502
B) .000667
C) .028134
D) .031644
E) .034625

Question 73

A stock has a return of 13.2 percent, and the risk-free rate is 4.6 percent. What is the risk premium for this stock?

A) 4.6%
B) 6.4%
C) 8.6%
D) 13.2%
E) 17.8%

Question 74

You find a stock with returns of 14.2%, - 10.1%, 8.7%, 29.7%, and 18.2%. The risk-free rate over this period was 6.4%, 6.8%, 5.2%, 4.4% and 5.3%. What was the variance of the returns?

A) .01876
B) .02139
C) .02647
D) .02968
E) .03192

Question 75

An asset had returns of 14%, 26%, - 13%, 8%, and 12% over the past five years. What was the variance of the returns?

A) .01287
B) .01614
C) .02018
D) .02632
E) .03512

Question 76

You find a stock with returns of 14.2%, - 10.1%, 8.7%, 29.7%, and 18.2%. The risk-free rate over this period was 6.4%, 6.8%, 5.2%, 4.4% and 5.3%. What was the standard deviation of the risk premium?

A) 10.59%
B) 11.86%
C) 13.16%
D) 14.02%
E) 15.41%

Question 77

You invested $20,000 eight years ago. With a geometric average return of 12.2 percent per year, what was your ending portfolio value?

A) $47,043
B) $48,162
C) $50,231
D) $52,406
E) $54,693

Question 78

An asset has annual returns of 14 percent, 8 percent, - 6 percent, 27 percent and 18 percent. What is the arithmetic return?

A) 11.64%
B) 12.20%
C) 13.05%
D) 14.16%
E) 15.25%

Question 79

You own a stock that dropped in price from $86.50 to $79.12. The dividend yield was 1.8 percent. What was your total return?

A) - 7.53%
B) - 6.73%
C) - 6.05%
D) - 5.48%
E) - 5.09%

Question 80

An initial investment of $10,000 twenty years ago is worth $119,379 today. What was the geometric average return per year over this 20-year period?

A) 10.5%
B) 11.1%
C) 11.7%
D) 12.4%
E) 13.2%