Question 1

Which one of the following is defined by its mean and its standard deviation?

Accepted Answer

A normal distribution is defined by its mean and standard deviation. The other options are not defined solely by these two parameters.

Question 2

Which one of the following correctly describes the dividend yield?

Accepted Answer

A

Question 3

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price.She received a total of $0.75 in dividends.Which one of the following statements is correct in relation to this investment?

Accepted Answer

Since the stock was sold for a price $3 higher than the purchase price, there was a capital gain. Additionally, a dividend of $0.75 was received. Therefore, the total return per share was positive and comprised of both capital gains and dividends. Therefore, the capital gains yield is positive.

Question 4

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

Accepted Answer

The real rate of return is the nominal rate of return minus the inflation rate. Therefore, if the inflation rate is positive, the real rate of return will be less than the nominal rate of return as long as the nominal rate of return is also positive.

Question 5

Small-company stocks, as the term is used in the textbook, are best defined as the:

Accepted Answer

Small-company stocks, as defined in the textbook, refers to the smallest twenty percent of the firms listed on the NYSE based on market capitalization.

Question 6

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

Accepted Answer

The arithmetic average return calculates the return earned in an average year over a multiyear period by summing the annual returns and dividing by the number of years.

Question 7

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent.Which one of the following terms refers to the difference between these two rates of return?

Accepted Answer

The difference between the rate of return on T-bills and large-company stocks is the risk premium. This is the additional return investors require to compensate them for the higher risk associated with investing in stocks.

Question 8

The real rate of return on a stock is approximately equal to the nominal rate of return:

Accepted Answer

The real rate of return on a stock is the nominal rate of return adjusted for inflation. Therefore, to get the real rate of return, we need to subtract the inflation rate from the nominal rate of return.

Question 9

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately.If the dividend yield remains at its pre-announcement level, then you know the stock price:

Accepted Answer

The decrease in the annual dividend from $1.64 to $1.50 per share means there is less return for investors, which leads to a decrease in demand for the stock. As a result, the price of the stock should decrease proportionately with the dividend decrease, resulting in a decrease in dividend yield.

Question 10

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities.Which one of the following terms best defines that market?

Accepted Answer

An efficient capital market is a market where the market prices of securities quickly and accurately reflect all available information, leaving little room for investors to consistently achieve returns that are higher than average.

Question 11

Which one of the following statements is a correct reflection of the U.S.markets for the period 1926-2010?

Accepted Answer

According to the statement "U.S.Treasury bills provided a positive rate of return each and every year during the period." All the other options are incorrect based on the given information.

Question 12

Standard deviation is a measure of which one of the following?

Accepted Answer

Standard deviation is a measure of the volatility or variability of a set of data. It shows how much the data deviates from the mean. It is commonly used in finance and investments to measure the risk or uncertainty associated with an investment's returns.

Question 13

Which one of the following categories of securities had the highest average return for the period 1926-2010?

Accepted Answer

Small company stocks have historically provided the highest average returns over long periods, outperforming other categories like large company stocks, government and corporate bonds, and treasury bills.

Question 14

Which one of the following best defines the variance of an investment's annual returns over a number of years?

Accepted Answer

The variance of an investment's annual returns over a number of years is the average squared difference between the actual returns and the arithmetic average return.

Question 15

Which one of the following statements related to capital gains is correct?

Accepted Answer

The capital gains yield is the percentage change in the market price of an investment from the previous period, reflecting realized and unrealized capital gains. Therefore, an increase in an unrealized capital gain will increase the capital gains yield. The other options are incorrect: A) the capital gains yield can include unrealized capital gains as well; C) the capital gains yield can be negative if the market price of the investment has decreased; D) the capital gains yield is expressed as a percentage of the initial investment, not the sales price; E) the capital gains yield represents only the portion of the total return earned by an investor that is derived from changes in the market price of the investment.

Question 16

Which one of the following statements best defines the efficient market hypothesis?

Accepted Answer

The efficient market hypothesis posits that at any given time, security prices fully reflect all available information, meaning that securities are priced appropriately given their inherent risk and return levels. This implies that it's impossible to consistently achieve higher returns without accepting higher risk, making securities in efficient markets essentially zero net present value investments, as they offer returns commensurate with their risk.

Question 17

Which of the following statements is correct in relation to a stock investment?
I.The capital gains yield can be positive, negative, or zero.
II.The dividend yield can be positive, negative, or zero.
III.The total return can be positive, negative, or zero.
IV.Neither the dividend yield nor the total return can be negative.

Accepted Answer

I. The capital gains yield is the change in the price of the stock from the purchase price, so it can be positive, negative, or zero.
II. The dividend yield is the dividends paid by the stock divided by the purchase price, so it cannot be negative, but it can be zero if the company does not pay dividends.
III. The total return includes both the capital gains yield and the dividend yield, so it can be positive, negative, or zero.
IV. The dividend yield cannot be negative, but the total return can be negative if the capital gains yield is negative and offsets the positive dividend yield.

Question 18

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

Accepted Answer

Small-company stocks have historically had the most volatile returns over the period 1926-2010. According to historical data, small-company stocks have had an annualized standard deviation of 32.0%, compared to large-company stocks at 20.2%, long-term corporate bonds at 9.6%, intermediate-term government bonds at 5.2%, and U.S. Treasury bills at 3.1%. Therefore, small-company stocks are the most volatile category of securities.

Question 19

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

Accepted Answer

The average compound return earned per year over a multi-year period is called the geometric average return. This takes into account the compounding effect on investment returns, which the arithmetic average does not.

Question 20

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?

Accepted Answer

U.S. Treasury bills had the lowest average risk premium during the period 1926-2010 as they are considered to be the safest investment with the lowest risk.

Quiz 12: Return, Risk and the Security Market