Question 1

An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain.How much was received in dividend income during the year?

Accepted Answer

The answer of An investor receives a 15% total return...

Question 2

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:

Accepted Answer

The appropriate opportunity cost of capital should reflect the return that investors give up on alternative investments with the same risk level. This ensures that investors are appropriately compensated for the level of risk they are taking. Choosing B, C, or D would not accurately reflect this principle.

Question 3

Which of the following statements is correct for an investor starting with $1,000 in common stocks over a 20-year investment horizon in which stocks averaged 11% in nominal terms and 4% in real terms? The portfolio value is now approximately:

Accepted Answer

To calculate the approximate portfolio value after 20 years, we can use the formula: 
Portfolio value = Initial investment x (1 + average nominal return)^number of years
Using the values given in the question, we get:
Portfolio value = 1000 x (1 + 0.11)^20
Portfolio value = $8,062 in nominal terms.

Question 4

How is it possible for real rates of return to increase during times when the rate of inflation increases?

Accepted Answer

Real rates of return are calculated as the difference between nominal rates of return (i.e. the actual returns on an investment) and the rate of inflation. If nominal returns increase more than inflation, then the real rate of return will also increase.

Question 5

Market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 7% return.If the investor sells now he or she is likely to receive:

Accepted Answer

When market interest rates rise, the value of existing bonds decreases as new bonds are now offering higher returns. This means that if the investor sells the bonds now, they would receive a lower price for them compared to what they paid originally, resulting in a total return that is less than 7%.

Question 6

Stock A has 10 million shares issued and stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

Accepted Answer

The weighting of a stock in the S&P 500 is based on its market capitalization, which is calculated by multiplying the number of shares issued by the current market price per share. Therefore, stock A having 10 million shares issued will likely have a larger market capitalization than stock B with only 5 million shares, resulting in a higher weighting in the S&P 500. As a result, A has twice the weighting, to account for having more shares.

Question 7

Which of the following guarantees is offered to common stock investors?

Accepted Answer

Common stock investors do not have any guarantees regarding dividends or capital gains. Their investment is subject to market fluctuations and the company's performance, so there are no guarantees of any form.

Question 8

"Dow up 14.Story at 6:00 p.m." This means that:

Accepted Answer

The statement "Dow up 14" usually refers to the Dow Jones Industrial Average, which is an index of 30 large, publicly-owned companies in the United States. The number 14 refers to the number of points that the index increased during that day's trading. Therefore, choice D is the best answer.

Question 9

The idea that investors in common stock may expect a lower total return when prices are relatively stable suggests that:

Accepted Answer

When stock prices are relatively stable, it can imply that risk premiums are at a normal level. This is because when there is less volatility in the market, investors are less likely to demand higher premiums to compensate for the perceived risk. Therefore, it is logical that investors may expect a lower total return during these periods.

Question 10

What is the percentage return on a stock that was purchased for $50.00,paid a $3.00 dividend after one year,and was then sold for $49.00?

Accepted Answer

The answer of What is the percentage return on a...

Question 11

The variance of an investment's returns is a measure of the:

Accepted Answer

The variance of an investment's returns is a measure of how much those returns vary or fluctuate over time, which is commonly referred to as volatility. Therefore, option A, which states that it is a measure of the volatility of the rates of return, is the correct answer. Option B is incorrect because variance does not measure the probability of a negative return; it only measures how much the returns vary around the mean return. Option C is also incorrect because variance does not provide information about historic returns over long periods. Option D is incorrect because variance is not a measure of the average value of an investment, but rather a measure of its volatility.

Question 12

In a year in which common stocks offered an average return of 18%,Treasury bonds offered 10% and Treasury bills offered 7%,the risk premium for common stocks was:

Accepted Answer

The risk premium for common stocks is calculated as the difference between the return on common stocks and the return on a risk-free investment, typically Treasury bills. Here, it is 18% - 7% = 11%.

Question 13

If a stock is purchased for $25 per share and held one year,during which time a $1.75 dividend is paid and the price climbs to $29.5,the nominal rate of return is:

Accepted Answer

The nominal rate of return is calculated by adding the dividend received to the capital gain and then dividing by the initial price. Here, the capital gain is $29.5 - $25 = $4.5, and the dividend is $1.75. So, the total return is $4.5 + $1.75 = $6.25. The nominal rate of return is ($6.25 / $25) * 100% = 25.00%.

Question 14

Which of the following statements seems most appropriate when the Dow Jones Industrial Average increases by 2%?

Accepted Answer

The Dow Jones Industrial Average (DJIA) is an index that represents the stock performance of 30 large, publicly-traded companies in the US. Therefore, option A and B are incorrect since not all stocks on the exchange increased by 2%, only the 30 DJIA stocks did. Option D is also incorrect since the S&P 500 is a different index than the DJIA. Option C is the best choice since it implies that the increase in the DJIA is representative of a broader market trend.

Question 15

What is the percentage return on a stock that was purchased for $40.00,paid no dividend after one year,and was then sold for $39.00?

Accepted Answer

To calculate the percentage return, we use the formula: 
Percentage Return = ((Sale Price - Purchase Price)/Purchase Price) x 100 
Substituting the given values, we get: ((39-40)/40) x 100 = -2.50%
Since we got a negative percentage return, it means that the stock incurred a loss. Therefore, choice A is the correct answer.

Question 16

Although Standard and Poor's Composite Index contains a small number of U.S.publicly traded stocks,the Index represents:

Accepted Answer

The Standard and Poor's Composite Index, commonly known as the S&P 500, represents approximately 75% of the U.S. stock market's total value, despite containing only 500 of the largest publicly traded companies.

Question 17

Although several stock indexes are available to inform investors of market changes,the Dow Jones Industrial Average:

Accepted Answer

The statement "is the best-known of the market indexes" indicates that the correct choice is D. The other choices are not accurate. A is incorrect because the S&P 500 is actually the broadest-based of the market indexes. B is incorrect because there are several reliable market indexes available. C is incorrect because the Dow Jones Industrial Average only represents about 25% of the total U.S. market value.

Question 18

In addition to the number of stocks represented,a difference between the S&P 500 and the Dow is that the S&P 500:

Accepted Answer

The S&P 500 is calculated based on the market value of the stocks, making it a value-weighted index. On the other hand, the Dow is calculated on the basis of the sum of the prices of the stocks, giving an equal weight to each stock in the index.

Question 19

The Dow Jones Industrial Average is:

Accepted Answer

The Dow Jones Industrial Average is an index of 30 major industrial stocks. It is not the most representative of stock market indexes and it does not cover America's 500 major corporations. It is also not an equally weighted index of all stocks traded on the New York Stock Exchange.

Question 20

From a historical perspective (1900-2007),what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5%?

Accepted Answer

Historically, the equity risk premium, which is the excess return that investing in the stock market provides over a risk-free rate, has averaged around 6-7%. Given a 7.5% return on Treasury bills, adding the average equity risk premium would result in an expected return on stocks of approximately 14.9%.

Quiz 11: Introduction to Risk,Return,and the Opportunity Cost of Capital