Question 1

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

Accepted Answer

Excess return refers to the return of an investment above the return of a benchmark or risk-free rate. The expectation of higher excess returns is often associated with higher risk or volatility, as investors demand compensation for taking on more uncertainty. Therefore, the statement that the greater the volatility of returns, the greater the expected excess return, aligns with risk-return tradeoff principles in finance.

Question 2

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

Accepted Answer

D

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 ________.

Accepted Answer

The annual rate of return on large-company stocks has historically been more volatile than the annual rate of return on long-term corporate bonds. This can be seen by comparing the standard deviation of returns for each asset class over the given time period. Therefore, choice E is the best answer option.

Question 4

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

Accepted Answer

The excess return is the return earned above the risk-free rate of return, which is typically the return on the U.S. Treasury bill. Therefore, we need to subtract the average return on the U.S. Treasury bill from the average return for the investment to calculate the excess return.

Question 5

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

Accepted Answer

The standard deviation is a measure of the dispersion or variability of returns. A higher standard deviation indicates a higher level of risk, which is often associated with the potential for higher returns.

Question 6

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

Accepted Answer

The answer of The average excess return on U.S.Treasury bills...

Question 7

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

Accepted Answer

The term that refers to the average rate of return is the mean. The variance and standard deviation are measures of risk, the real return is the return adjusted for inflation, and the histogram is a graphical representation of the distribution of returns.

Question 8

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

Accepted Answer

According to historical data, small-company stocks have tended to outperform other securities over the long-term during the period of 1926 through 2017. While past performance is not a guarantee for future returns, small-company stocks have historically offered higher potential returns, but also come with higher risk and volatility compared to larger company stocks or government bonds.

Question 9

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

Accepted Answer

The answer of Over the period of 1926 to 2017,the...

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?

Accepted Answer

U.S. Treasury bills have tended to produce the lowest real rate of return for the period 1926 through 2017, as they are considered to be one of the safest investments and therefore offer lower returns compared to other riskier securities such as stocks or 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:

Accepted Answer

Small-company stocks typically refer to the smallest 20% of companies listed on major exchanges like the NYSE, based on market capitalization.

Question 12

On average,for the period 1926 through 2017:

Accepted Answer

The excess return on long-term corporate bonds has historically exceeded the excess return on long-term government bonds due to the higher risk associated with corporate bonds, which typically offer higher yields to compensate for this increased risk.

Question 13

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

Accepted Answer

The answer of Capital market history shows us that a...

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.

Accepted Answer

Small-company stocks have historically shown the highest volatility, followed by large-company stocks, and then long-term corporate bonds.

Question 15

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

Accepted Answer

The answer of Over the period of 1926 to 2017,small-company...

Question 16

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

Accepted Answer

The average annual return on long-term corporate bonds for the period of 1926 to 2017 was 6.4 percent.

Question 17

The standard deviation of small-company stocks:

Accepted Answer

Small-company stocks have higher volatility and risk than larger stocks, therefore the standard deviation is larger. The standard deviation of U.S. Treasury bills is low due to their low risk, thus the standard deviation of small-company stocks is about ten times as large as the standard deviation of U.S. Treasury bills.

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.

Accepted Answer

According to data provided by Ibbotson Associates, the average annual return on small-company stocks was about 4.4 percentage points greater than the average annual return on large-company stocks over the period of 1926 to 2017.

Question 19

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

Accepted Answer

The combination of capital gains yield and dividend yield is known as the total return on a security.

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:

Accepted Answer

The stock price decreased from $39 to $37, resulting in a decrease in value for the investor, which is described as a capital loss. The dividend payment of $3 per share is not relevant to the change in the stock price. Therefore, choices A, B, D, and E are incorrect.

Quiz 10: Lessons From Market History