Question 1

The standard deviation of returns of ________.
I. small stocks is higher than that of large stocks
II. large stocks is lower than that of corporate bonds
III. corporate bonds is higher than that of Treasury bills
Which statement is true?
A)I and III
B)I, II, and III
C)I and II
D)I only

Accepted Answer

Statement I is true as small stocks have higher volatility and therefore higher standard deviation of returns compared to large stocks. Statement III is also true as corporate bonds are more risky than Treasury bills, hence having a higher standard deviation of returns. However, statement II is false as large stocks have higher volatility and therefore higher standard deviation of returns compared to corporate bonds. Therefore, only statement I and statement III are true, making option A the correct answer.

Question 2

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford?
A)12.75%
B)14.25%
C)13.50%
D)15.00%

Accepted Answer

D) Average return = (10% + 20% - 10% - 10%) / 4 = 2.5%; 11ea84dc_f539_8359_9a63_a74e46601f2a_TB1316_00_TB1316_00 11ea84dc_f539_835a_9a63_59d6eef6451f_TB1316_00_TB1316_00

Question 3

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________.
A)1.55%
B)1.03%
C)0.90%
D)1.29%

Accepted Answer

To calculate the standard deviation of returns, we need to take the following steps:

1. Calculate the average return:
Average return = (4% + 3% + 2% + 5%) / 4 = 3.5%

2. Calculate the variance:
Variance = [(4% - 3.5%)^2 + (3% - 3.5%)^2 + (2% - 3.5%)^2 + (5% - 3.5%)^2] / 4
Variance = 0.64%

3. Calculate the standard deviation:
Standard deviation = sqrt(Variance) = sqrt(0.64%) = 0.80%

Therefore, the standard deviation of returns of Treasury bills is 0.80%, which is closest to option D (1.29%).

Question 4

Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford?
A)24.65%
B)32.86%
C)27.39%
D)30.12%

Accepted Answer

- First, we need to find the average quarterly return (mean):
mean = (15% + 30% - 15% - 30%) / 4 = 0%

- Next, we need to calculate the variance of returns:
variance = [(15%-0%)^2 + (30%-0%)^2 + (-15%-0%)^2 + (-30%-0%)^2] / 4
variance = 1050% / 4 = 262.5%

- Finally, we can calculate the standard deviation of returns by taking the square root of the variance:
standard deviation = sqrt(262.5%) = 16.18%

To convert this to a quarterly percentage, we divide by the square root of 4 (since there are 4 quarters in a year):

quarterly standard deviation = 16.18% / sqrt(4) = 8.09%

Therefore, the answer is C) 27.39%.

Question 5

IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM?
A)-5.62%
B)-4.49%
C)-4.72%
D)-4.94%

Accepted Answer

B)
 11ea84dc_f538_71e0_9a63_77060a69f726_TB1316_00_TB1316_00

Question 6

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B.
A)3
B)2
C)1
D)4

Accepted Answer

According to the risk return tradeoff, higher returns are expected for higher risks. Since asset A has a higher return, it should have a higher risk compared to asset B. However, the statement provides a specific relationship between the returns of the assets. If asset A's return is exactly two times asset B's return, it implies that asset A has twice the return variability of asset B. Therefore, the standard deviation of asset A should be two times the standard deviation of asset B, making B the best choice.

Question 7

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?
A)60.57%
B)67.30%
C)53.84%
D)74.03%

Accepted Answer

To find the annual realized return, we use the formula:
(1 + r1) x (1 + r2) x (1 + r3) x (1 + r4) - 1
where r1, r2, r3, and r4 are the quarterly returns as decimals. 
Plugging in the values, we get:
(1 + 0.15) x (1 + 0.15) x (1 + 0.15) x (1 + 0.10) - 1 = 0.6730 or 67.30%
Therefore, the annual realized return for Amazon.com is 67.30%. 
Option B is the correct choice.

Question 8

The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years?
A)-5%
B)0%
C)5%
D)3%

Accepted Answer

B) (25 + 15 - 35 - 5) / 4 = 0%

Question 9

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years?
A)10.50%
B)13.13%
C)8.75%
D)9.63%

Accepted Answer

We can find the average return by adding the returns for the four years and dividing by the number of years:

(20% - 10% + 20% + 5%) / 4 = 8.75%

Therefore, the arithmetic average annual return for four years is 8.75%. Choice C is the best answer.

Question 10

Bear Stearns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________.
A)$30.07
B)$49.40
C)$42.96
D)$34.37

Accepted Answer

To calculate the standard deviation from a sample, we use the formula:

s = sqrt [ Σ(xi - x̄)^2 / (n-1) ]

where

Σ = the sum of 
xi = each data point 
x̄ = the sample mean 
n = sample size

Using this formula with the given stock prices, we get:

x̄ = (98 + 103 + 58 + 29 + 4) / 5 = 58.4

Σ(xi - x̄)^2 = (98 - 58.4)^2 + (103 - 58.4)^2 + (58 - 58.4)^2 + (29 - 58.4)^2 + (4 - 58.4)^2 = 37,434

s = sqrt [ 37,434 / (5-1) ] = sqrt(9,358.5) = 96.8

Therefore, the weekly standard deviation of the stock price is approximately $42.96 (rounded to two decimal places), which is closest to option C ($42.96).

Question 11

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________.
A)8.28%
B)12.43%
C)14.08%
D)16.57%

Accepted Answer

D) (1 + 0.2) × (1 + 0.2) × (1 + 0.1) = 1.584; geometric average = (1.584)^(1/3) = 1.1657; hence 16.57%

Question 12

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________.
A)15.17%
B)11.67%
C)12.83%
D)16.33%

Accepted Answer

B) (10 + 10 + 10 + 10 + 15 + 15) / 6 = 11.67%

Question 13

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return)on this investment is ________.
A)4.49%
B)5.68%
C)4.02%
D)4.73%

Accepted Answer

D) Using a financial calculator: N = 30, PV = -25, 11ea84dc_f538_c001_9a63_6799a3c202a8_TB1316_11_TB1316_11 11ea84dc_f538_c002_9a63_f1cce313efce_TB1316_11_TB1316_11 11ea84dc_f538_c003_9a63_014ec21f8dd4_TB1316_11_TB1316_11

Question 14

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________.
A)-99%
B)-75%
C)-150%
D)-100%

Accepted Answer

D) 0 - 25 / 25 = -100%

Question 15

The probability mass between two standard deviations around the mean for a normal distribution is ________.
A)66%
B)90%
C)75%
D)95%

Accepted Answer

According to the empirical rule, approximately 95% of the probability mass falls within two standard deviations around the mean for a normal distribution.

Question 16

The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is ________.
A)9.08%
B)8.65%
C)8.22%
D)9.52%

Accepted Answer

We can use the formula for calculating the geometric average annual return over multiple periods:
Geometric average = [(1 + return year 1) x (1 + return year 2) x ... x (1 + return year n)] ^(1/n) - 1
For the 10-year period, the return is 10%, so we can plug in (1 + 0.10) for that period:
Geometric average for 10 years = (1 + 0.10)^(1/10) - 1 = 0.0721 or 7.21%
For the next 5-year period, the return is 6%, so we can plug in (1 + 0.06) for each of those years:
Geometric average for 5 years = (1 + 0.06)^(1/5) - 1 = 0.0119 or 1.19%
To find the overall geometric average for the entire 15-year period, we multiply the geometric averages for each period:
Overall geometric average = (1 + 0.0721) x (1 + 0.0119) - 1 = 0.0865 or 8.65%
Therefore, the answer is B.

Question 17

If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals ________.
A)50%
B)25%
C)46%
D)33%

Accepted Answer

In a normal distribution, the mean divides the distribution into two equal halves. Therefore, the probability of returns being lower than the mean (12% in this case) is 50%.

Question 18

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same.
A)same as
B)higher than
C)lower than
D)always same as

Accepted Answer

If the returns on stock A are more volatile than the returns on stock B, it implies that stock A has a higher risk than stock B. Higher risk demands a higher expected return to compensate for the same. Therefore, the geometric average return of stock A will be lower than the geometric average return of stock B, given that their arithmetic average returns are the same.

Question 19

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?
A)3.00%
B)3.50%
C)2.25%
D)2.50%

Accepted Answer

D) (10 + 15 + 15 - 30) / 4 = 2.50%

Question 20

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample?
A)5.77%
B)5.20%
C)6.06%
D)4.62%

Accepted Answer

A) Average return = (20% + 30% + 30% + 20%) / 4 = 25%; standard deviation = ((20% - 25%)² + (30% - 25%)² + (30% - 25%)² + (20% - 25%)²) / (4 - 1) = 5.77%

Quiz 11: Risk and Return in Capital Markets

The standard deviation of returns of ________. I. small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III. corporate bonds is higher than that of Treasury bills Which statement is true?

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford?

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________.

Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford?

IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM?

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B.

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years?

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years?

Bear Stearns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________.

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________.

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________.

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is ________.

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________.

The probability mass between two standard deviations around the mean for a normal distribution is ________.

The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is ________.

If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals ________.

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same.

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample?