Question 1

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

Accepted Answer

Capital gains yield can include both realized and unrealized capital gains. It reflects the change in the price of an investment, and an increase in unrealized capital gains (the increase in the value of an investment that has not yet been sold) indeed increases the capital gains yield. This yield is typically expressed as a percentage of the investment's initial cost, not the sales price, and it does not represent the total return since it excludes dividends or interest income. Additionally, capital gains yield can be negative if the investment's value decreases.

Question 2

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 choices are not solely defined by mean and standard deviation.

Question 3

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2007?

Accepted Answer

According to the question, the period is between 1926-2007, and the statement that is a correct reflection is that "U.S. Treasury bills provided a positive rate of return each and every year during the period." This means that U.S. Treasury bills never provided a negative return during the period and always had a positive return, although the return may not have been very high. This statement is true as per historical data available.

Question 4

Which one of the following categories of securities had the highest average return for the period 1926-2007?

Accepted Answer

Small company stocks historically have had the highest average returns over the period 1926-2007 compared to other categories of securities.

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, refer to the smallest twenty percent of the firms listed on the NYSE based on market capitalization. This definition is commonly used in finance and investing.

Question 6

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, the nominal rate of return must be reduced by the inflation rate to obtain the real rate of return. This means that the real rate of return is approximately equal to the nominal rate of return minus the inflation rate.

Question 7

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 Stacy sold the stock for more than her purchase price, she has a positive capital gain. The dividend yield is calculated by dividing the annual dividend by the purchase price, and is not related to the selling price. The total dollar return per share is the sum of the capital gain and the dividend, which in this case is $3.75. Therefore, (A) and (C) are incorrect. It is not clear whether the capital gain would have been less without the dividends, as we do not know the timing and amount of the dividends. Finally, it is not clear whether the dividend yield is greater than the capital gains yield, as we don't have enough information about the stock price or the dividend amounts.

Question 8

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 9

Which one of the following correctly describes the dividend yield?

Accepted Answer

The answer of Which one of the following correctly describes...

Question 10

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

Statement I is correct because the capital gains yield can be positive, negative, or zero, depending on whether the current stock price is higher, lower, or equal to the purchase price.
Statement II is incorrect because the dividend yield can never be negative, but it can be zero if the company does not pay any dividends.
Statement III is correct because the total return can be positive, negative, or zero, depending on the stock price fluctuations and dividends received.
Statement IV is incorrect because both the dividend yield and the total return can be negative if the stock price decreases significantly and the company reduces or eliminates its dividend payments.

Question 11

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

Accepted Answer

Standard deviation is a measure of volatility, which represents how much a stock or portfolio's returns vary from its average return. It is commonly used to assess risk in investments.

Question 12

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

Accepted Answer

The variance measures the spread of a data set. In the case of investment returns, it measures how much the actual returns deviate from the average return. The formula for variance is the average of the squared differences between each data point and the arithmetic average. Therefore, the best choice is E, which describes the average squared difference between the actual returns and the arithmetic average return.

Question 13

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 return on T-bills and large-company stocks is the risk premium, which represents the additional return an investor requires to compensate for the additional risk they are taking by investing in stocks instead of risk-free assets like T-bills.

Question 14

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 15

Which one of the following categories of securities has had the most volatile returns over the period 1926-2007?

Accepted Answer

According to historical data from 1926-2007, small-company stocks have had the most volatile returns compared to other categories of securities. This means that the price of small-company stocks fluctuated the most, potentially resulting in higher gains or losses compared to the other options listed.

Question 16

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 is because it takes into account the compounding effect of returns over time, which is important for measuring investment performance. The arithmetic average return, on the other hand, simply calculates the average return for each year over the period without taking into account the compounding effect. Standard and variant averages are not commonly used in finance, and real average returns adjust for inflation.

Question 17

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 one in which the prices of securities fully reflect all available information. This means that investors cannot consistently achieve returns that are higher than average by using publicly available information.

Question 18

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 calculated by subtracting the inflation rate from the nominal rate of return. Therefore, if the inflation rate is positive, the real rate of return will be less than the nominal rate of return.

Question 19

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

When a company lowers its dividend payout, it usually indicates that the company is not performing as well as expected. As a result, investors may view the stock as less valuable and may try to sell their shares, causing the stock price to decrease proportionately with the dividend decrease. Therefore, the stock price would have decreased proportionately with the dividend decrease in this scenario.

Question 20

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2007?

Accepted Answer

U.S. Treasury bills had the lowest average risk premium during the period of 1926-2007, as they are considered to be the least risky of all the securities listed.

Quiz 12: Some Lessons From Capital Market History