Deck 10: Lessons From Market History

Question 1

Which one of the following is a correct statement concerning the excess return?

A)The greater the volatility of returns,the greater the expected excess return.
B)The lower the volatility of returns,the greater the expected excess return.
C)The lower the average rate of return,the greater the excess return.
D)The excess return is not correlated to the average rate of return.
E)The excess return is not affected by the volatility of returns.

Answer 1

The greater the volatility of returns,the greater the expected excess return.

Question 2

Based on the period of 1926 through 2017,U.S.Treasury bills have produced annual rates of return that:

A)ranged from −1 percent to +15 percent.
B)ranged from −1 percent to +5 percent.
C)were negative only during the Great Depression.
D)have always been positive.
E)never exceeded 6 percent.

Answer 2

have always been positive.

Question 3

Over the period of 1926 through 2017,the annual rate of return on ________ has been more volatile than the annual rate of return on ________.

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

Answer 3

large-company stocks; long-term corporate bonds

Question 4

The excess return is computed by ________ the average return for the investment.

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

Question 5

Which one of the following statements concerning the standard deviation is correct?

A)The standard deviation is a measure of total return.
B)The higher the standard deviation,the higher the expected return.
C)The standard deviation varies in direct relation to increases in dividend yield.
D)The higher the standard deviation,the lower the risk.
E)The lower the standard deviation,the less certain the rate of return in any one given year.

Question 6

The average excess return on U.S.Treasury bills over the period of 1926 to 2017 was ________ percent.

A).4
B)1.6
C)2.2
D)3.1
E)3.8

Question 7

Another term that refers to the average rate of return is the:

A)variance.
B)standard deviation.
C)real return.
D)mean.
E)histogram.

Question 8

Based on the period of 1926 through 2017,________ have tended to outperform other securities over the long-term.

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

Question 9

Over the period of 1926 to 2017,the average rate of inflation was ________ percent.

A)2.0
B)2.7
C)3.0
D)3.8
E)4.3

Question 10

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2017?

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

Question 11

A portfolio of small-company common stocks,as used in this course,is best described as the stocks of the firms which:

A)represent the smallest twenty percent of the companies listed on the NYSE.
B)have gone public within the past five years.
C)are too small to be listed on the NYSE.
D)are included in the S&P 500 index.
E)trade publicly for $5 a share or less.

Question 12

On average,for the period 1926 through 2017:

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

Question 13

Capital market history shows us that a correct ordering of the average return by asset classes,from lowest to highest,is:

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

Question 14

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2017? Rank from highest to lowest volatility.

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

Question 15

Over the period of 1926 to 2017,small-company stocks had an average return of ________ percent.

A)14.8
B)15.2
C)17.3
D)14.6
E)16.5

Question 16

The average annual return on long-term corporate bonds for the period of 1926 to 2017 was ________ percent.

A)3.8
B)5.8
C)6.4
D)7.9
E)8.4

Question 17

The standard deviation of small-company stocks:

A)had an average value of about 20 percent for the period 1926 to 2017.
B)is roughly equivalent to the standard deviation on stocks of all sizes.
C)is about ten times as large as the standard deviation of U.S.Treasury bills.
D)is less than the standard deviation on large-company stocks.
E)produces a narrow normal distribution curve.

Question 18

The average annual return on small-company stocks was about ________ percentage points greater than the average annual return on large-company stocks over the period of 1926 to 2017.

A)3.4
B)4.4
C)5.4
D)6.4
E)7.4

Question 19

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

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

Question 20

Alpha Industries stock sold for $39 a share at the beginning of the year.During the year,the company paid a dividend of $3 a share and then ended the year with a stock price of $37.The change in the stock price is best described as a:

A)capital gain.
B)positive total dollar return.
C)capital loss.
D)negative total dollar return.
E)negative dividend yield.

Question 21

In estimating the future equity risk premium,it is important to include assumptions about the:

A)historical distribution of returns on derivative securities only.
B)future risk environment only.
C)amount of risk aversion of future investors only.
D)historical distribution of returns on derivative securities and the future risk environment.
E)future risk environment and the amount of risk aversion of future investors.

Question 22

One year ago,you purchased a stock at a price of $32.50.The stock pays quarterly dividends of $.40 per share.Today,the stock is worth $34.60 per share.What is the total dollar return per share to date from this investment?

A)$3.40
B)$3.70
C)$2.10
D)$2.50
E)$3.80

Question 23

From November 2007 through January 2009,the S&P 500 Index lost approximately what percent of its value?

A)37
B)51
C)43
D)33
E)45

Question 24

Which country has the highest Sharpe ratio based on historical equity risk premiums and standard deviations of returns for the period 1900-2010?

A)Italy
B)Australia
C)United States
D)Germany
E)Norway

Question 25

In 2008,which country experienced a decline in its stock market value in excess of 90 percent?

A)India
B)Russia
C)China
D)United States
E)Iceland

Question 26

A year ago,you purchased 300 shares of New Tech stock at a price of $49.03 per share.The stock pays an annual dividend of $.10 per share.Today,you sold all your shares for $58.14 per share.What is your total dollar return on this investment?

A)$2,755
B)$2,733
C)$2,703
D)$2,763
E)$3,006

Question 27

Six months ago,you purchased 100 shares of stock in ABC Co.at a price of $43.89 a share.ABC stock pays a quarterly dividend of $.10 a share.Today,you sold all your shares for $45.13 per share.What is the total amount of your capital gains on this investment?

A)$1.24
B)$1.64
C)$40.00
D)$124.00
E)$164.00

Question 28

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

A)gamma
B)Poisson
C)bimodal
D)normal
E)uniform

Question 29

One year ago,you purchased a stock at a price of $32 a share.Today,you sold the stock and realized a total return of 14.62 percent.Your capital gain was $3.48 a share.What was your dividend yield on this stock?

A)2.25 percent
B)3.75 percent
C)3.35 percent
D)2.85 percent
E)4.35 percent

Question 30

The standard deviation for a set of stock returns can be calculated as the:

A)positive square root of the average return.
B)average squared difference between the actual return and the average return.
C)positive square root of the variance.
D)average return divided by N minus one,where N is the number of returns.
E)variance squared.

Question 31

You just sold 700 shares of Alcove stock at a price of $34.08 a share.Last year you paid $39.20 a share to buy this stock.You received dividends totalling $1.04 per share.What is your total capital gain on this investment?

A)−$3,584
B)−$3,672
C)−$3,544
D)−$2,856
E)−$2,608

Question 32

The Sharpe ratio is computed as the average:

A)equity risk premium divided by the standard deviation.
B)squared deviation divided by the average excess return.
C)excess return divided by the variance of the returns.
D)equity risk premium divided by the variance.
E)squared deviation divided by the (Number of returns − 1).

Question 33

You purchased 300 shares of stock at a price of $21.72 per share.Over the last year,you have received total dividend income of $210.What is the dividend yield?

A)3.06 percent
B)3.22 percent
C)3.17 percent
D)2.92 percent
E)2.94 percent

Question 34

Of these countries,which one has the highest historical equity risk premium for the period 1900-2010?

A)Italy
B)Ireland
C)Switzerland
D)Spain
E)Norway

Question 35

The average squared difference between the actual return and the average return is called the:

A)volatility return.
B)variance.
C)standard deviation.
D)risk premium.
E)excess return.

Question 36

In 2008,which asset class had the highest rate of return in the U.S.?

A)Small-company stocks
B)Long-term U.S.Treasury bonds
C)Large-company stocks
D)Short-term U.S.Treasury bonds
E)High-quality long-term corporate bonds

Question 37

Winslow,Inc.,stock is currently selling for $40 a share.The stock has a dividend yield of 3.8 percent.How much dividend income will you receive per year if you purchase 600 shares of this stock?

A)$152
B)$790
C)$329
D)$912
E)$1,053

Question 38

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 39

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

Question 40

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

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

Question 41

Assume that over the last several decades,the total annual returns on large-company common stocks averaged 12.1 percent,small-company stocks averaged 16.5 percent,long-term government bonds averaged 6 percent,and U.S.T-bills averaged 3.4 percent.What was the average excess return earned by long-term government bonds,and small-company stocks respectively?

A)1.8 percent; 13.3 percent
B)2.6 percent; 13.1 percent
C)2.6 percent; 4.4 percent
D)1.9 percent; 5.1 percent
E)4.4 percent; 2.6 percent

Question 42

A stock has an expected rate of return of 8.3 percent and a standard deviation of 6.4 percent.Which one of the following best describes the probability that this stock will lose more than 4.50 percent in any one given year?

A)Less than 2.5 percent
B)Less than 1.0 percent
C)Less than 1.5 percent
D)Less than .5 percent
E)Less than 5 percent

Question 43

Six months ago,you purchased 1,200 shares of ABC stock for $21.20 a share and have received total dividend payments of $.60 a share.Today,you sold all your shares for $22.20 a share.What is your total dollar return on this investment?

A)$720
B)$1,200
C)$1,440
D)$1,920
E)$3,840

Question 44

Winslow,Inc.,stock is currently selling for $59.48 a share.The stock has an expected growth rate of 4.22 percent and an expected total return for the next year of 9.87 percent.How much dividend income should you expect to receive next year if you purchase 800 shares of this stock today?

A)$2,309.20
B)$2,008.04
C)$2,688.50
D)$2,380.15
E)$2,001.10

Question 45

Today,you sold 300 shares of SLG stock and realized a total return of 12.5 percent.You purchased the shares one year ago at a price of $27.43 a share.You have received a total of $192 in dividends.What is your capital gains yield on this investment?

A)14.80 percent
B)9.39 percent
C)6.67 percent
D)10.17 percent
E)11.67 percent

Question 46

You bought 360 shares of stock at a total cost of $7,754.40.You received a total of $403.20 in dividends and sold your shares for $19.98 a share.What was your total rate of return?

A)3.67 percent
B)−2.04 percent
C)−1.29 percent
D)7.24 percent
E)5.38 percent

Question 47

You purchased 300 shares of Deltona stock for $43.90 a share.You have received a total of $630 in dividends and $14,620 in proceeds from selling the shares.What is your capital gains yield on this stock?

A)6.23 percent
B)11.01 percent
C)17.68 percent
D)9.55 percent
E)15.79 percent

Question 48

Eight months ago,you purchased 400 shares of Winston stock at a price of $46.40 a share.The company pays quarterly dividends of $1.05 a share.Today,you sold all your shares for $48.30 a share.What is your total percentage return on this investment?

A)10.12 percent
B)4.09 percent
C)8.62 percent
D)12.08 percent
E)7.34 percent

Question 49

One year ago,you purchased 300 shares of IXC stock at a price of $22.05 per share,received $460 in dividends over the year,and today sold all your shares for $29.32 per share.What was your dividend yield?

A)5.23 percent
B)5.87 percent
C)6.95 percent
D)1.92 percent
E)2.48 percent

Question 50

Two years ago,you purchased 100 shares of stock in ABC at a price of $43.26 a share.The stock pays an annual dividend of $.10 a share.Today,you sold all your shares for $46.71 per share.What is your holding period return?

A)8.24 percent
B)7.81 percent
C)7.97 percent
D)8.44 percent
E)8.90 percent

Question 51

A stock had annual returns of 7.63 percent,9.28 percent,−3.11 percent,and 15.09 percent for the past four years,respectively.What is the real arithmetic average rate of return for this period if inflation averaged 2.3 percent?

A)4.15 percent
B)5.24 percent
C)4.81 percent
D)5.02 percent
E)5.36 percent

Question 52

You invested in long-term corporate bonds and earned 6.8 percent.During that same time period,large-company stocks returned 12.6 percent,long-term government bonds returned 6.4 percent,U.S.Treasury bills returned 4.2 percent,and inflation averaged 3.8 percent.What excess return did you earn?

A)2.6 percent
B)2.3 percent
C)1.3 percent
D).4 percent
E)3.0 percent

Question 53

A stock had annual returns of 3 percent,18 percent,and −24 percent over a three-year period.Based on this information,what is the 68 percent probability range for any one given year?

A)−40.53 to 38.53 percent
B)−20.28 to 22.28 percent
C)−20.28 to 20.28 percent
D)−22.28 to 20.28 percent
E)−43.56 to 41.56 percent

Question 54

Soo Lee owns a stock that has had annual returns of 11.6 percent,9.3 percent,−22.8 percent,and 34.6 percent over the last four-year period.What is his arithmetic mean return on this investment?

A)7.94 percent
B)19.58 percent
C)14.62 percent
D)11.47 percent
E)8.18 percent

Question 55

You have a sampling of returns for the Malta Stock Fund.The returns are 7.25 percent,5.63 percent,12.56 percent,and 1.08 percent.What is the mean and variance of this sampling?

A)6.57 percent; .00287
B)6.63 percent; .00225
C)6.65 percent; .00215
D)6.63 percent; .00287
E)6.63 percent; .00215

Question 56

You bought 600 shares of stock at $24.20 each.At the end of the year,you received a total of $720 in dividends,and your stock was worth a total of $15,678.What was your total dollar capital gain and total dollar return?

A)$1,878; $2,598
B)$1,878; $1,158
C)$1,158; $1,878
D)$1,158; $2,598
E)$2,598; $1,878

Question 57

BCD shares are currently selling for $27.38 each.You bought 200 shares one year ago at $26.59 and received dividend payments of $1.27 per share.What was your percentage capital gain for the year?

A)2.97 percent
B)3.21 percent
C)7.75 percent
D)−2.89 percent
E)7.52 percent

Question 58

You purchased 300 shares of stock at a price of $37.23 per share.Over the last year,you have received total dividend income of $351.What is the capital gains yield if your total return is 11.47 percent?

A)8.33 percent
B)7.26 percent
C)9.39 percent
D)9.50 percent
E)7.67 percent

Question 59

Three years ago,you purchased a stock at a price of $33.48.The stock paid annual dividends of $.60 per share.Today,the stock is worth $35.20 per share.What is your holding period return?

A)10.03 percent
B)6.93 percent
C)10.51 percent
D)5.14 percent
E)6.59 percent

Question 60

A stock had returns of 9 percent,−6 percent,4 percent,and 16 percent over the past four years.What is the standard deviation of these returns?

A)8.56 percent
B)6.67 percent
C)7.14 percent
D)9.25 percent
E)7.98 percent

Question 61

Suppose you own a risky asset with an expected return of 12.6 percent and a standard deviation of 18.2 percent.If the returns are normally distributed,the most accurate probability that the stock will return more than 50 percent in any one given year is best described as less than:

A).025 percent.
B).05 percent.
C)2.5 percent.
D).01 percent.
E)1.25 percent.

Question 62

A stock had returns of 8 percent,39 percent,11 percent,and −24 percent for the past four years.Which one of the following best describes the probability that this stock will not lose more than 43 percent in any one given year?

A)92.5 percent
B)95.0 percent
C)97.5 percent
D)84.0 percent
E)99.5 percent

Question 63

Assume a stock had an historical equity risk premium of 5.49 percent and a standard deviation of 11.46 percent over the past two decades.What is the 95.4 percent range for the equity risk premium?

A)−.18 percent to 9.26 percent
B)−.57 percent to 15.09 percent
C).41 percent to 20.03 percent
D)−.36 percent to 10.62 percent
E)1.08 percent to 22.49 percent

Question 64

Over the past four years,a stock produced returns of 14 percent,22 percent,6 percent,and −19 percent.What is the approximate probability that an investor in this stock will not lose more than 30 percent nor earn more than 41 percent in any one given year?

A)84 percent
B)95 percent
C)68 percent
D)5 percent
E)34 percent

Question 65

What are the arithmetic and geometric (Answer in that order.)average returns for a stock with annual returns of 9.4 percent,8.2 percent,−7.3 percent,4.1 percent,and 9.5 percent?

A)5.61 percent; 4.58 percent
B)5.61 percent; 4.78 percent
C)4.78 percent; 4.58 percent
D)4.58 percent; 5.61 percent
E)4.58 percent; 4.78 percent

Question 66

A stock was priced at $23.08,$24.15,$23.99,and $24.26 at end of Years 1 to 4,respectively.The annual dividend is constant at $.20 a share.What is the geometric average return on this stock?

A)3.27 percent
B)2.52 percent
C)2.56 percent
D)2.48 percent
E)2.54 percent

Question 67

Assume you are comparing two stocks that are identical in every way except that one stock pays dividends and the other does not.How would you expect this difference to affect the annual performance of the dividend-paying stock as compared to the non-dividend-paying stock?

Question 68

A stock had returns of 16 percent,4 percent,−22 percent,15 percent,and −2 percent for the past five years.What is the variance of these returns?

A).01997
B).02037
C).02402
D).01869
E).02340

Question 69

A stock had annual returns of 8 percent,14 percent,and 2 percent for the past three years.Based on these returns,what is the probability that this stock will return more than 26 percent in any one given year?

A)2.5 percent
B)1.0 percent
C).5 percent
D)5.0 percent
E)16.0 percent

Question 70

What are the arithmetic and geometric average returns (Answer in that order.)for a stock with annual returns of 4 percent,9 percent,−6 percent,and 18 percent?

A)5.89 percent; 6.25 percent
B)6.25 percent; 5.89 percent
C)6.25 percent; 8.33 percent
D)8.33 percent; 5.89 percent
E)8.33 percent; 8.33 percent

Question 71

A stock had returns of 12 percent,6 percent,13 percent,−11 percent,and −2 percent over the past five years.What is the geometric average return for this time period?

A)3.60 percent
B)3.19 percent
C)3.29 percent
D)3.62 percent
E)4.40 percent

Question 72

The return pattern on your favorite stock has been 5.39 percent,8.26 percent,−12.04 percent,and 14.27 percent over the last four years.What are the average arithmetic and geometric rates of return?

A)3.45 percent; 3.21 percent
B)3.97 percent; 3.48 percent
C)3.88 percent; 3.64 percent
D)3.92 percent; 3.56 percent
E)3.51 percent; 3.26 percent

Question 73

Suppose you have $30,000 invested in the stock market and your banker comes to you and tries to get you to move that money into the bank's certificates of deposit (CDs).He explains that the CDs are 100 percent government insured and that you are taking unnecessary risks by being in the stock market.How would you respond?

Question 74

What does the historical record reveal about the relationship between the returns on U.S.Treasury bills and the rate of inflation as measured by the consumer price index? Is this relationship what investors would tend to expect? Why or why not?

Question 75

What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?

Question 76

Based on historical market performance,what can we conclude about the relationship between return and risk?

Question 77

The returns on a portfolio over the last five years were −5.2 percent,21.6 percent,4.5 percent,11.7 percent,and 5.9 percent.What is the standard deviation of these returns?

A)8.82 percent
B)9.21 percent
C)9.86 percent
D)9.08 percent
E)9.73 percent