Question 1

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 ________.

Accepted Answer

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

Question 2

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?

Accepted Answer

B) (1 + 0.15) × (1 + 0.15) × (1 + 0.15) × (1 + 0.1) = 1.6730;
1.6730 - 1 = 0.673 or 67.30%

Question 3

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 ________.

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 4

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.

Accepted Answer

According to risk return tradeoff, higher returns are expected with higher risk. If asset A's return is exactly two times asset B's return, then A is considered to have higher return than B. Therefore, A should also have higher risk (higher standard deviation) than B. Since A's return is exactly two times B's return, the standard deviation of A should be two times the standard deviation of B. Hence, the answer is B.

Question 5

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?

Accepted Answer

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

Question 6

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 ________.

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 7

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

Accepted Answer

D) Average return = (4% + 3% + 2%+ 5%) / 4 = 3.5%; 11ea84dc_f539_f88d_9a63_27162d3808eb_TB1316_00_TB1316_00

Question 8

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?

Accepted Answer

C) Average return = (15% + 30% + -15% + -30%) / 4 = 0%; 11ea84dc_f539_aa6b_9a63_2599dbd32a5a_TB1316_00_TB1316_00

Question 9

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 ________.

Accepted Answer

C) Average return = $(98 + 103 + 58 + 29 + 4) / 5 = $58.4; 11ea84dc_f539_3537_9a63_9102ab39884e_TB1316_00_TB1316_00 11ea84dc_f539_5c48_9a63_279923553417_TB1316_00_TB1316_00

Question 10

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?

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 11

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?

Accepted Answer

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

Question 12

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 ________.

Accepted Answer

B) 11ea84dc_f539_0e24_9a63_6b4ae8719e4e_TB1316_00_TB1316_00 11ea84dc_f539_0e25_9a63_8349f11fcb2b_TB1316_00_TB1316_00 total return over 15 years = 2.5937 × 1.3382 = 3.4710; 11ea84dc_f539_0e26_9a63_6dfb1db13192_TB1316_00_TB1316_00 geometric average annual return = 8.65%

Question 13

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 ________.

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 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 ________.

Accepted Answer

D) 0 - 25 / 25 = -100%

Question 15

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

Accepted Answer

The standard deviation covers 68% of the data in one direction from the mean in a normal distribution. Therefore, two standard deviations (in both directions) would cover approximately 95% of the data.

Question 16

The standard deviation of returns of ________. I. small stocks is higher than that of large stocks
 Which statement is true?

Accepted Answer

The answer of The standard deviation of returns of ________....

Question 17

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?

Accepted Answer

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

Question 18

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?

Accepted Answer

B)
 11ea84dc_f538_71e0_9a63_77060a69f726_TB1316_00_TB1316_00

Question 19

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?

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%

Question 20

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.

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.

Quiz 11: Risk and Return in Capital Markets