For a 5-year period, a stock had annual returns of 6.4 percent, -11.2 percent, 0.3 percent, 19.8 percent, and 13.4 percent. What is the geometric average return?

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Question 1

For a 5-year period, a stock had annual returns of 6.4 percent, -11.2 percent, 0.3 percent, 19.8 percent, and 13.4 percent. What is the geometric average return?

5.74%

5.18%

9.96%

10.02%

7.93%

rg = (1.064*0888*1.003*1.198*1.134)^1/5 - 1 = 1.28743526^1/5 -1 = 0.0518 = 5.18%

Question 2

Maria purchased a stock for $42.67 a share and sold it one year later for $43.89 a share. She also received a dividend of $1.20 per share. What was her capital gains yield?

5.51%

2.86%

5.67%

2.34%

4.99%

Capital Gains Yield = (P1-P0)/P0 = (43.89-42.67)/42.67 = 0.02859 = 2.86%

Question 3

Which one of the following asset classes had the highest level of risk over the 1926 to 2012 period as measured by the standard deviation?

Long-term corporate bonds

U.S. Treasury bills

Long-term government bonds

Small-company stocks

Large-company stocks

Question 4

A stock produced annual returns of 20 percent, -12 percent, 16 percent, and 2 percent over the last four years, respectively. What is the standard deviation?

19.89 percent

17.48 percent

21.17 percent

14.55 percent

16.87 percent

Avg Return = (20-12+16+2)/4 = 26/4 = 6.5%

STD = {[(0.2-0.065)^2 + (-0.12-0.065)^2 + (0.16-0.065)^2 + (0.02-0.065)^2]/(4-1)}^0.5 =

{0.0635/3}^0.5 = 0.14549 = 14.55%

Question 5

A stock produced annual returns of 8 percent, -12 percent, 6 percent, 1 percent, and 19 percent over the last five years, respectively. What is the variance of these returns?

.009914

.044667

.012730

.010184

.050920

Avg Return = (8-12+6+1+19)/5 = 22/5 = 4.4%

Variance = [(0.08-0.044)^2 + (-0.12-0.044)^2 + (0.06-0.044)^2 + (0.01-0.044)^2 + (0.19- 0.044)^2] / (5-1) = 0.05092/4 = 0.01273

 

Question 6

For a 5-year period, a stock had annual returns of 6.4 percent, -11.2 percent, 0.3 percent, 19.8 percent, and 13.4 percent. What is the arithmetic average return?

6.28 percent

5.18 percent

5.74 percent

7.09 percent

7.18 percent

Arithmetic Avg = (6.4-11.2+0.3+19.8+13.4)/5 = 28.7/5 = 5.74%

Question 7

In 2012, U.S. Treasury bills returned 0.08 percent while inflation was 1.74 percent. What was the real rate of return on U.S. Treasury bills (i.e., by how much has your wealth increased)? Use the formula, not the approximation.

0.08 percent

1.82 percent

-.38 percent

-1.63 percent

-6.15 percent

Real return = [(1+nominal)/(1+inflation)] - 1 = [1.0008/1.0174] - 1 = 0.98368 - 1 =

-0.0163 = -1.63%

Question 8

In 2012, large-company stocks returned 16 percent, U.S. Treasury bills returned 0.08 percent, and inflation was 1.74 percent. What was the risk-premium on large-company stocks?

17.74%

14.26%

15.92%

16.08%

1.66%

MRP = 16% - 0.08% = 15.92%

Question 9

Which one of the following is true about risk and return over the long-term?

Riskier assets will, on average, earn lower returns.

The reward for bearing risk is known as the standard deviation.

Based on historical data, there is no reward for bearing risk.

An increase in the risk of an investment will result in a decreased risk premium.

In general, the higher the expected return, the higher the risk.

Question 10

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2012? Rank from highest volatility to lowest volatility.

Small-company stocks, large-company stocks, long-term government bonds

Large-company stocks, U.S. Treasury bills, long-term government bonds

Small-company stocks, long-term government bonds, large-company stocks

Long-term corporate bonds, large-company stocks, U.S. Treasury bills

Small-company stocks, long-term corporate bonds, large-company stocks

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