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Exam 12: Return, Risk and the Security Market

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Question 1

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A stock had returns of 14 percent, 13 percent, -10 percent, and 7 percent for the past four years.Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year?

A) greater than 0.5 but less than 1.0 percent
B) greater than 1.0 percent but less than 2.5 percent
C) greater than 2.5 percent but less than 16 percent
D) greater than 84 percent but less than 97.5 percent
E) greater than 95 percent

F) B) and E)
G) B) and C)

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D

Question 2

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You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 3 percent, -10 percent, 24 percent, 22 percent, and 12 percent.Suppose the average inflation rate over this time period was 3.6 percent and the average T-bill rate was 4.8 percent.Based on this information, what was the average nominal risk premium?

A) 5.15 percent
B) 5.40 percent
C) 6.01 percent
D) 6.37 percent
E) 6.60 percent

F) C) and E)
G) C) and D)

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Question 3

Multiple Choice

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What was the average rate of inflation over the period of 1926-2010?

A stock had returns of 12 percent, 16 percent, 10 percent, 19 percent, 15 percent, and -6 percent over the last six years.What is the geometric average return on the stock for this period?

You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16 percent for four of the last five years.The average return of the stock for the 5-year period was 13 percent.What is the standard deviation of the stock's returns for the five-year period?

Which one of the following is most indicative of a totally efficient stock market?

Which of the following correspond to a wide frequency distribution? I.relatively low risk II.relatively low rate of return III.relatively high standard deviation IV.relatively large risk premium

You own 400 shares of Western Feed Mills stock valued at $51.20 per share.What is the dividend yield if your annual dividend income is $352?

Which of the following statements are true based on the historical record for 1926-2010? I.Risk and potential reward are inversely related. II.Risk-free securities produce a positive real rate of return each year. III.Returns are more predictable over the short-term than they are over the long-term. IV.Bonds are generally a safer investment than are stocks.

Which one of the following statements concerning U.S.Treasury bills is correct for the period 1926- 2010?

Which one of the following earned the highest risk premium over the period 1926-2010?

Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent.Using Blume's formula, what is your best estimate of the future annual returns over the next 5 years?

Calculate the standard deviation of the following rates of return:

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

Which one of the following statements is correct?

If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result? I.decrease in the average rate of return II.increase in the risk premium III.increase in the 68 percent probability range of the frequency distribution of returns IV.decrease in the standard deviation

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years.What is the geometric average return for this time period?

Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87.What was the capital gains yield?

Assume that you invest in a portfolio of large-company stocks.Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010.What rate of return should you expect to earn?