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Exam 1: A Brief History of Risk and Return

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Question 1

Multiple Choice

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Over the past five years, Teen Clothing stock produced returns of 18.7, 5.8, 7.9, 10.8, and 11.6 percent, respectively. For the same five years, the risk-free rate 5.2, 3.4, 2.8, 3.4, and 3.9 percent, respectively. What is the arithmetic average risk premium on Teen Clothing stock for this time period?

A) 6.89 percent
B) 7.01 percent
C) 7.22 percent
D) 7.34 percent
E) 7.57 percent

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Question 2

Multiple Choice

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You invested $5,000 eight years ago. The arithmetic average return on your investment is 10.6 percent and the geometric average return is 10.23 percent. What is the value of your portfolio today?

A) $9,092
B) $10,623
C) $10,899
D) $10,947
E) $11,195

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Question 3

Multiple Choice

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Based on the period of 1926-2009, the risk premium for small-company stocks averaged:

A stock has an average arithmetic return of 12.55 percent and an average geometric return of 12.40 percent based on the annual returns for the last 15 years. What is projected average annual return on this stock for the next 10 years?

Which one of the following should be used to compare the overall performance of three different investments?

Capital gains are included in the return on an investment:

Shane purchased a stock this morning at a cost of $11 a share. He expects to receive an annual dividend of $.27 a share next year. What will the price of the stock have to be one year from today if Shane is to earn a 15 percent rate of return on this investment?

Which one of the following had the narrowest bell curve for the period 1926-2009?

The geometric return on a stock over the past 10 years was 8.42 percent. The arithmetic return over the same period was 9.02 percent. What is the best estimate of the average return on this stock over the next 5 years?

The risk premium is defined as the rate of return on:

An initial investment of $25,000 forty years ago is worth $1,533,913 today. What is the geometric average return on this investment?

Elise just sold a stock and realized a 6.2 percent return for a 4-month holding period. What was her annualized rate of return?

One year ago, you purchased 100 shares of Southern Foods common stock for $40.7 a share. Today, you sold your shares for $39.70 a share. During this past year, the stock paid $1.40 in dividends per share. What is your dividend yield on this investment?

An asset had annual returns of 14, 11, -15, 2, and 37 percent, respectively, for the past five years. What is the standard deviation of these returns?

Big Town Markets common stock returned 13.8, 14.2, 9.7, 5.3, and 12.2 percent, respectively, over the past five years. What is the arithmetic average return?

Jim began his investing program with a $4000 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar- weighted average return?

The capital gains yield is equal to:

Over the past four years, a stock produced returns of 13, 6, -5, and 18 percent, respectively. What is the standard deviation of these returns?

For the period 1926-2009, long-term government bonds had an average return that ______ the average return on long-term corporate bonds while having a standard deviation that _______ the standard deviation of the long-term corporate bonds.

Jim began his investing program with a $4000 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar- weighted average return?