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 ________.
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 2

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 3

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)
 11eaabab_c088_cf2b_b90e_f791a24c0c5e_TB5536_00

Question 4

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 5

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

D) Average return = (4% + 3% + 2%+ 5%) / 4 = 3.5%; 11eaabab_c089_b997_b90e_838ab4f08520_TB5536_11

Question 6

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

C) Average return = $(98 + 103 + 58 + 29 + 4) / 5 = $58.4; 11eaabab_c089_4462_b90e_ff5123dd1cf2_TB5536_11 11eaabab_c089_6b73_b90e_29943eda2ecf_TB5536_11

Question 7

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

The probability mass between two standard deviations around the mean for a normal distribution is 95%. This is known as the 95% Confidence Interval (CI). It is a commonly used threshold in scientific research and statistical analysis, as it provides a high level of confidence that the results are accurate and reliable.

Question 8

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

B) 11eaabab_c089_445f_b90e_4d9f40b92e5e_TB5536_11 11eaabab_c089_4460_b90e_4fa66e019c7c_TB5536_11 total return over 15 years = 2.5937 × 1.3382 = 3.4710; 11eaabab_c089_4461_b90e_971cd30e0580_TB5536_11 geometric average annual return = 8.65%

Question 9

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

C) Average return = (15% + 30% + -15% + -30%) / 4 = 0%; 11eaabab_c089_9286_b90e_ed6336c1e1fb_TB5536_11

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?
A) 12.75%
B) 14.25%
C) 13.50%
D) 15.00%

Accepted Answer

D) Average return = (10% + 20% - 10% - 10%) / 4 = 2.5%; 11eaabab_c089_6b74_b90e_73de0b2c3ed3_TB5536_11 11eaabab_c089_6b75_b90e_f3fb95bc3981_TB5536_11

Question 11

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, 11eaabab_c088_f63c_b90e_5d6b21ee2618_TB5536_11 11eaabab_c088_f63d_b90e_df9193dc5c9e_TB5536_11 11eaabab_c089_1d4e_b90e_37c2a6fea3a7_TB5536_11

Question 12

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%

Question 13

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 14

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

Small stocks are considered riskier investments than large stocks, so they tend to have higher volatility, which translates into a higher standard deviation. Similarly, corporate bonds are riskier than Treasury bills, so they tend to have higher volatility and a higher standard deviation of returns. Therefore, statements I and III are true. Statement II comparing large stocks to corporate bonds is not necessarily true in all cases, as it may depend on the specific stocks and bonds being compared.

Question 15

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

Since asset A's return is exactly two times asset B's return, it is expected to have more return with the same level of risk. Therefore, the standard deviation of asset A should be only two times the standard deviation of asset B, which is best represented by choice B.

Question 16

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 17

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

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

Question 18

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

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

Question 19

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 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.
A) same as
B) higher than
C) lower than
D) always same as

Accepted Answer

The geometric average return takes into account the compounding effect of returns over time. If the returns on stock A are more volatile than the returns on stock B, it implies that there are more fluctuations in the returns of stock A than stock B. This can lead to larger swings in the value of stock A than stock B. This volatility can, in turn, affect the geometric average return of stock A, making it lower than the geometric average return of stock B when their arithmetic return is the same. Therefore, the best choice is C, lower than.

Quiz 11: Risk and Return in Capital Markets

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 ________.

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?

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?

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 ________.

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

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 ________.

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 ________.

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?

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?

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 ________.

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?

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?

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?

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.

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 ________.

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 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years?

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 ________.

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.