Question 1

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.

Accepted Answer

Estimating the future equity risk premium requires considering the future risk environment, as it directly impacts expected returns, and the amount of risk aversion of future investors, as it influences market dynamics and pricing. Historical data on derivatives alone (A, D) does not provide a comprehensive view of the equity market's future risk and return profile.

Question 2

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

Accepted Answer

The total dollar return per share consists of two parts: the dividend income and the capital gain/loss. To calculate the dividend income, we need to multiply the quarterly dividends by the number of quarters. One year has four quarters, so the total dividends per share are:

Dividends = 4 x $0.40 = $1.60

To calculate the capital gain/loss per share, we need to subtract the initial price from the current price:

Capital gain/loss = $34.60 - $32.50 = $2.10

Finally, we can add the dividend income and the capital gain/loss to get the total dollar return per share:

Total return = Dividends + Capital gain/loss = $1.60 + $2.10 = $3.70

Therefore, the answer is B.

Question 3

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

Accepted Answer

The answer of From November 2007 through January 2009,the S&P...

Question 4

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

Accepted Answer

Australia has historically offered the highest Sharpe ratio among the listed countries, indicating it has provided the best risk-adjusted returns on equities over the period 1900-2010.

Question 5

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

Accepted Answer

Iceland experienced a decline in its stock market value in excess of 90 percent in 2008 due to the global financial crisis and the collapse of its banking system.

Question 6

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

Accepted Answer

The total dollar return on the investment can be calculated as the sum of the capital gain and the dividends received.

Capital gain per share = Selling price per share - Purchase price per share = $58.14 - $49.03 = $9.11

Total capital gain = 300 shares × $9.11 = $2,733

Dividends received per share = $0.10

Total dividends received = 300 shares × $0.10 per share = $30

Total dollar return = Total capital gain + Total dividends received = $2,733 + $30 = $2,763

Therefore, the correct answer is D) $2,763.

Question 7

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

Accepted Answer

The capital gain per share is the selling price minus the purchase price, which is $45.13 - $43.89 = $1.24. For 100 shares, the total capital gain is $1.24 * 100 = $124.00.

Question 8

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

Accepted Answer

The normal distribution is a symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation. The other options (gamma, Poisson, bimodal, and uniform distributions) have different characteristics and cannot be completely defined by just their mean and standard deviation.

Question 9

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

Accepted Answer

The total return of 14.62 percent on the stock includes both the capital gain and the dividend yield. The capital gain of $3.48 per share on a purchase price of $32 per share translates to a capital gain percentage of ($3.48 / $32) * 100% = 10.875%. To find the dividend yield, subtract the capital gain percentage from the total return percentage: 14.62% - 10.875% = 3.745%, which rounds to 3.75 percent, matching option B.

Question 10

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.

Accepted Answer

The standard deviation is the positive square root of the variance. The variance is calculated as the average of the squared differences between each return and the average return. Therefore, choice C is the correct answer as it describes the correct calculation for the standard deviation.

Question 11

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

Accepted Answer

The total capital gain (or loss) is calculated by taking the difference between the selling price and the buying price, including dividends received. Here, the calculation is: $$(34.08 - 39.20 + 1.04) \times 700 = (-4.08) \times 700 = -2,856$$. However, the correct calculation, considering the dividends correctly, should be: $$(34.08 \times 700) + (1.04 \times 700) - (39.20 \times 700) = 23,856 + 728 - 27,440 = -2,856$$. The mistake in the initial explanation led to the wrong conclusion. The correct approach to find the total capital gain or loss includes considering the total amount from selling the shares, adding the total dividends received, and then subtracting the total amount paid for the shares. The correct calculation is: Selling price (34.08 * 700) + Dividends (1.04 * 700) - Buying price (39.20 * 700). However, the initial response mistakenly provided the answer and explanation for a per-share basis calculation without correctly applying it to the total number of shares. The correct total capital gain or loss should be calculated by considering the total transaction amounts, including the dividends for all shares.

Question 12

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).

Accepted Answer

The Sharpe ratio is computed as the average equity risk premium divided by the standard deviation of the excess returns. This measures the performance of an investment compared to a risk-free asset, after adjusting for its risk.

Question 13

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

Accepted Answer

The answer of You purchased 300 shares of stock at...

Question 14

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

Accepted Answer

Italy has the highest historical equity risk premium for the period 1900-2010. This is because Italy, despite its economic challenges, has experienced significant market volatility and periods of high returns, contributing to a higher risk premium compared to the more stable markets of Switzerland, Norway, Ireland, and Spain.

Question 15

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.

Accepted Answer

The average squared difference between the actual return and the average return is the definition of variance.

Question 16

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

Accepted Answer

The answer of In 2008,which asset class had the highest...

Question 17

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

Accepted Answer

The dividend income per share is calculated as $40 * 3.8% = $1.52. For 600 shares, the total dividend income per year is $1.52 * 600 = $912.

Question 18

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.

Accepted Answer

The formula for variance of returns is the sum of squared deviations divided by the number of returns minus one. This formula takes into account the variability in returns over time, and uses the squared deviations (i.e., the difference between actual returns and the average return, squared) to measure the extent of this variability. By dividing this sum by the number of returns minus one, we adjust for the fact that we are estimating the population variance from a sample, and this requires the use of a slightly different formula than for the population variance.

Question 19

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

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 20

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

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 effect of compounding, which is important when evaluating investment returns. The arithmetic average return, on the other hand, is just the simple average return and does not account for compounding. The other options (standard, variant, real) are not related to calculating average returns.

Quiz 10: Lessons From Market History

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

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?

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

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

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

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?

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

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?

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

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?

The Sharpe ratio is computed as the average:

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?

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

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

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

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?

The variance of returns is computed by dividing the sum of the:

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

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