Chap 10. economics PDF

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Chapter 10 Lessons from Market History 1) Alpha Industries stock sold for $39 a share at the beginning of the year. During the year, the company paid a dividend of $3 a share and then ended the year with a stock price of $37. The change in the stock price is best described as a: A) capital gain. B) positive total dollar return. C) capital loss. D) negative total dollar return. E) negative dividend yield. 2) The capital gains yield plus the dividend yield on a security is called the: A) variance of returns. B) geometric return. C) average period return. D) current yield. E) total return. 3) A portfolio of small-company common stocks, as used in this course, is best described as the stocks of the firms which: A) represent the smallest twenty percent of the companies listed on the NYSE. B) have gone public within the past five years. C) are too small to be listed on the NYSE. D) are included in the S&P 500 index. E) trade publicly for $5 a share or less. 6) Another term that refers to the average rate of return is the: A) variance. B) standard deviation. C) real return. D) mean. E) histogram. 8) On average, for the period 1926 through 2017: A) the real rate of return on U.S. Treasury bills has been negative. B) small-company stocks have underperformed large-company stocks. C) long-term government bonds have produced higher returns than long-term corporate bonds. D) the excess return on long-term corporate bonds has exceeded the excess return on longterm government bonds. E) the excess return on large-company stocks has exceeded the excess return on small-company stocks.

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16) The excess return is computed by ________ the average return for the investment. A) subtracting the inflation rate from B) adding the inflation rate to C) subtracting the average return on the U.S. Treasury bill from D) adding the average return on the U.S. Treasury bill to E) subtracting the average return on long-term government bonds from 17) Which one of the following is a correct statement concerning the excess return? A) The greater the volatility of returns, the greater the expected excess return. B) The lower the volatility of returns, the greater the expected excess return. C) The lower the average rate of return, the greater the excess return. D) The excess return is not correlated to the average rate of return. E) The excess return is not affected by the volatility of returns. 18) Which one of the following statements concerning the standard deviation is correct? A) The standard deviation is a measure of total return. B) The higher the standard deviation, the higher the expected return. C) The standard deviation varies in direct relation to increases in dividend yield. D) The higher the standard deviation, the lower the risk. E) The lower the standard deviation, the less certain the rate of return in any one given year. 19) The standard deviation of small-company stocks: A) had an average value of about 20 percent for the period 1926 to 2017. B) is roughly equivalent to the standard deviation on stocks of all sizes. C) is about ten times as large as the standard deviation of U.S. Treasury bills. D) is less than the standard deviation on large-company stocks. E) produces a narrow normal distribution curve. 20) Capital market history shows us that a correct ordering of the average return by asset classes, from lowest to highest, is: A) corporate bonds, U.S. Treasury bills, small-company stocks, large-company stocks. B) U.S. Treasury bills, small-company stocks, large-company stocks, government bonds. C) government bonds, U.S. Treasury bills, large-company stocks, small-company stocks. D) U.S. Treasury bills, government bonds, corporate bonds, large-company stocks. E) U.S. Treasury bills, long-term government bonds, intermediate-term government bonds, small-company stock. 21) The average squared difference between the actual return and the average return is called the: A) volatility return. B) variance. C) standard deviation. D) risk premium. E) excess return.

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22) The standard deviation for a set of stock returns can be calculated as the: A) positive square root of the average return. B) average squared difference between the actual return and the average return. C) positive square root of the variance. D) average return divided by N minus one, where N is the number of returns. E) variance squared. 23) A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the ________ distribution. A) gamma B) Poisson C) bimodal D) normal E) uniform 24) The variance of returns is computed by dividing the sum of the: A) squared deviations by the number of returns minus one. B) average returns by the number of returns minus one. C) average returns by the number of returns plus one. D) squared deviations by the average rate of return. E) squared deviations by the number of returns plus one. 25) The Sharpe ratio is computed as the average: A) equity risk premium divided by the standard deviation. B) squared deviation divided by the average excess return. C) excess return divided by the variance of the returns. D) equity risk premium divided by the variance. E) squared deviation divided by the (Number of returns − 1). 26) The average compound return earned per year over a multi-year period is called the ________ average return. A) arithmetic B) standard C) variant D) geometric E) real 27) The return earned in an average year over a multi-year period is called the ________ average return. A) arithmetic B) standard C) variant D) geometric E) real

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30) In estimating the future equity risk premium, it is important to include assumptions about the: A) historical distribution of returns on derivative securities only. B) future risk environment only. C) amount of risk aversion of future investors only. D) historical distribution of returns on derivative securities and the future risk environment. E) future risk environment and the amount of risk aversion of future investors. 34) One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today, the stock is worth $34.60 per share. What is the total dollar return per share to date from this investment? A) $3.40 B) $3.70 C) $2.10 D) $2.50 E) $3.80 Explanation: Total dollar return = $34.60 − 32.50 + $.40(4) = $3.70 35) Six months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today, you sold all your shares for $45.13 per share. What is the total amount of your capital gains on this investment? A) $1.24 B) $1.64 C) $40.00 D) $124.00 E) $164.00 Explanation: Gain = ($45.13 − 43.89)(100)= $124 36) A year ago, you purchased 300 shares of New Tech stock at a price of $49.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all your shares for $58.14 per share. What is your total dollar return on this investment? A) $2,755 B) $2,733 C) $2,703 D) $2,763 E) $3,006 Explanation: Total dollar return = ($58.14 − 49.03 + .10)(300) = $2,763

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37) You purchased 300 shares of stock at a price of $21.72 per share. Over the last year, you have received total dividend income of $210. What is the dividend yield? A) 3.06 percent B) 3.22 percent C) 3.17 percent D) 2.92 percent E) 2.94 percent Explanation: Dividend yield = ($210/300)/$21.72 = .0322, or 3.22% 38) Winslow, Inc., stock is currently selling for $40 a share. The stock has a dividend yield of 3.8 percent. How much dividend income will you receive per year if you purchase 600 shares of this stock? A) $152 B) $790 C) $329 D) $912 E) $1,053 Explanation: Div = $40(.038)(600) = $912 39) One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized a total return of 14.62 percent. Your capital gain was $3.48 a share. What was your dividend yield on this stock? A) 2.25 percent B) 3.75 percent C) 3.35 percent D) 2.85 percent E) 4.35 percent Explanation: Dividend yield = .1462 − ($3.48/$32) = .0375, or 3.75% 40) You just sold 700 shares of Alcove stock at a price of $34.08 a share. Last year you paid $39.20 a share to buy this stock. You received dividends totalling $1.04 per share. What is your total capital gain on this investment? A) −$3,584 B) −$3,672 C) −$3,544 D) −$2,856 E) −$2,608 Explanation: g = ($34.08 − $39.20)(700) = −$3,584

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41) You purchased 300 shares of Deltona stock for $43.90 a share. You have received a total of $630 in dividends and $14,620 in proceeds from selling the shares. What is your capital gains yield on this stock? A) 6.23 percent B) 11.01 percent C) 17.68 percent D) 9.55 percent E) 15.79 percent Explanation: g = [$14,620 − (300)($43.90)]/[300($43.90)] = .1101, or 11.01% 42) Today, you sold 300 shares of SLG stock and realized a total return of 12.5 percent. You purchased the shares one year ago at a price of $27.43 a share. You have received a total of $192 in dividends. What is your capital gains yield on this investment? A) 14.80 percent B) 9.39 percent C) 6.67 percent D) 10.17 percent E) 11.67 percent Explanation: g = .125 − [($192/300)/$27.43] = .1017, or 10.17% 43) Six months ago, you purchased 1,200 shares of ABC stock for $21.20 a share and have received total dividend payments of $.60 a share. Today, you sold all your shares for $22.20 a share. What is your total dollar return on this investment? A) $720 B) $1,200 C) $1,440 D) $1,920 E) $3,840 Explanation: Total dollar return = ($22.20 − 21.20 + .60)(1,200) = $1,920 44) Eight months ago, you purchased 400 shares of Winston stock at a price of $46.40 a share. The company pays quarterly dividends of $1.05 a share. Today, you sold all your shares for $48.30 a share. What is your total percentage return on this investment? A) 10.12 percent B) 4.09 percent C) 8.62 percent D) 12.08 percent E) 7.34 percent Explanation: R = [$48.30 − 46.40 + $1.05(2)]/$46.40 = .0862, or 8.62%

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45) You bought 360 shares of stock at a total cost of $7,754.40. You received a total of $403.20 in dividends and sold your shares for $19.98 a share. What was your total rate of return? A) 3.67 percent B) −2.04 percent C) −1.29 percent D) 7.24 percent E) 5.38 percent Explanation: R = [360($19.98) − $7,754.40 + 403.20]/$7,754.40 = −.0204, or −2.04% 46) You bought 600 shares of stock at $24.20 each. At the end of the year, you received a total of $720 in dividends, and your stock was worth a total of $15,678. What was your total dollar capital gain and total dollar return? A) $1,878; $2,598 B) $1,878; $1,158 C) $1,158; $1,878 D) $1,158; $2,598 E) $2,598; $1,878 Explanation: Gain = $15,678 − 600($24.20) = $1,158 Total dollar return = $1,158 + 720 = $1,878 47) BCD shares are currently selling for $27.38 each. You bought 200 shares one year ago at $26.59 and received dividend payments of $1.27 per share. What was your percentage capital gain for the year? A) 2.97 percent B) 3.21 percent C) 7.75 percent D) −2.89 percent E) 7.52 percent Explanation: g = ($27.38 − 26.59)/$26.59 = .0297, or 2.97% 48) One year ago, you purchased 300 shares of IXC stock at a price of $22.05 per share, received $460 in dividends over the year, and today sold all your shares for $29.32 per share. What was your dividend yield? A) 5.23 percent B) 5.87 percent C) 6.95 percent D) 1.92 percent E) 2.48 percent Explanation: Dividend yield = ($460/300)/$22.05 = .0695, or 6.95%

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49) You purchased 300 shares of stock at a price of $37.23 per share. Over the last year, you have received total dividend income of $351. What is the capital gains yield if your total return is 11.47 percent? A) 8.33 percent B) 7.26 percent C) 9.39 percent D) 9.50 percent E) 7.67 percent Explanation: g = .1147 − [($351/300)/$37.23] = .0833, or 8.33% 50) Winslow, Inc., stock is currently selling for $59.48 a share. The stock has an expected growth rate of 4.22 percent and an expected total return for the next year of 9.87 percent. How much dividend income should you expect to receive next year if you purchase 800 shares of this stock today? A) $2,309.20 B) $2,008.04 C) $2,688.50 D) $2,380.15 E) $2,001.10 Explanation: Div = (.0987 − .0422)($59.48)(800) = $2,688.50 51) A stock had annual returns of 7.63 percent, 9.28 percent, −3.11 percent, and 15.09 percent for the past four years, respectively. What is the real arithmetic average rate of return for this period if inflation averaged 2.3 percent? A) 4.15 percent B) 5.24 percent C) 4.81 percent D) 5.02 percent E) 5.36 percent Explanation: R = [.0763 + .0928 + (−.0311) + .1509]/4 = .0722, or 7.22% r = 1.0722/1.023 − 1 = .0481, or 4.81% 52) Three years ago, you purchased a stock at a price of $33.48. The stock paid annual dividends of $.60 per share. Today, the stock is worth $35.20 per share. What is your holding period return? A) 10.03 percent B) 6.93 percent C) 10.51 percent D) 5.14 percent E) 6.59 percent Explanation: R3 = [$35.20 − 33.48 + 3($.60)]/$33.48 = .1051, or 10.51% 53) Two years ago, you purchased 100 shares of stock in ABC at a price of $43.26 a share. The 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

stock pays an annual dividend of $.10 a share. Today, you sold all your shares for $46.71 per share. What is your holding period return? A) 8.24 percent B) 7.81 percent C) 7.97 percent D) 8.44 percent E) 8.90 percent Explanation: R2 = [$46.71 − 43.26 + 2($.10)]/$43.26 = .0844, or 8.44% 54) Soo Lee owns a stock that has had annual returns of 11.6 percent, 9.3 percent, −22.8 percent, and 34.6 percent over the last four-year period. What is his arithmetic mean return on this investment? A) 7.94 percent B) 19.58 percent C) 14.62 percent D) 11.47 percent E) 8.18 percent Explanation: Mean = [.116 + .093 + (−.228) + .346]/4 = .0818, or 8.18% 55) Assume that over the last several decades, the total annual returns on large-company common stocks averaged 12.1 percent, small-company stocks averaged 16.5 percent, long-term government bonds averaged 6 percent, and U.S. T-bills averaged 3.4 percent. What was the average excess return earned by long-term government bonds, and small-company stocks respectively? A) 1.8 percent; 13.3 percent B) 2.6 percent; 13.1 percent C) 2.6 percent; 4.4 percent D) 1.9 percent; 5.1 percent E) 4.4 percent; 2.6 percent Explanation: Excess returnLong-term bonds = 6% − 3.4 = 2.6% = 16.5% – 3.4 = 13.1% 56) You invested in long-term corporate bonds and earned 6.8 percent. During that same time period, large-company stocks returned 12.6 percent, long-term government bonds returned 6.4 percent, U.S. Treasury bills returned 4.2 percent, and inflation averaged 3.8 percent. What excess return did you earn? A) 2.6 percent B) 2.3 percent C) 1.3 percent D) .4 percent E) 3.0 percent Explanation: Excess return = 6.8% − 4.2 = 2.6% 9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

57) You have a sampling of returns for the Malta Stock Fund. The returns are 7.25 percent, 5.63 percent, 12.56 percent, and 1.08 percent. What is the mean and variance of this sampling? A) 6.57 percent; .00287 B) 6.63 percent; .00225 C) 6.65 percent; .00215 D) 6.63 percent; .00287 E) 6.63 percent; .00215 Explanation: Average return = (.0725 + .0563 + .1256 + .0108)/4 = .0663, or 6.63% Var = [(.0725 − .0663)2 + (.0563 − .0663)2 + (.1256 − .0663)2 + (.0108 − .0663)2]/(4 − 1) = . 00225 58) A stock had returns of 9 percent, −6 percent, 4 percent, and 16 percent over the past four years. What is the standard deviation of these returns? A) 8.56 percent B) 6.67 percent C) 7.14 percent D) 9.25 percent E) 7.98 percent Explanation: Average return = [.09 + (−.06) + .04 + .16]/4 = .0575 SD = {[(.09 − .0575)2 + (−.06 − .0575)2 + (.04 − .0575)2 + (.16 − .0575)2]/(4 − 1)}.5 = .0925, or 9.25% 59) A stock has an expected rate of return of 8.3 percent and a standard deviation of 6.4 percent. Which one of the following best describes the probability that this stock will lose more than 4.50 percent in any one given year? A) Less than 2.5 percent B) Less than 1.0 percent C) Less than 1.5 percent D) Less than .5 percent E) Less than 5 percent Explanation: Lower bound95% = .083 − 2(.064) = −.0450, or −4.50% The probability of losing more than 4.50 percent in any one year is less than 2.5 percent.

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60) A stock had annual returns of 3 percent, 18 percent, and −24 percent over a three-year period. Based on this information, what is the 68 percent probability range for any one given year? A) −40.53 to 38.53 percent B) −20.28 to 22.28 percent C) −20.28 to 20.28 percent D) −22.28 to 20.28 percent E) −43.56 to 41.56 percent Explanation: Average return = [.03 + .18 + (−.24)]/3 = − .01, or −1% σ = {[.03 − (−.01)]2 + [.18 − (−.01)]2 + [(−.24) − (−.01)]2}/(3 − 1)).5 = .2128, or 21.28% Range68% = −.01 ± 1(.2128) = −.2228 to .2028, or −22.28 to 20.28% 61) A stock had annual returns of 8 percent, 14 percent, and 2 percent for the past three years. Based on these returns, what is the probability that this stock will return more than 26 percent in any one given year? A) 2.5 percent B) 1.0 percent C) .5 percent D) 5.0 percent E) 16.0 percent Explanation: Average return = (.08 + .14 + .02)/3 = .08, or 8% SD = {[(.08 − .08)2 + (.14 − .08)2 + (.02 − .08)2]/(3 − 1)}.5 = .06, or 6% Upper bound99% = .08 + 3(.06) = .26, or 26% There is a .5 percent probability the stock will return more than 26 percent in any one given year. 62) A stock had returns of 16 percent, 4 percent, −22 percent, 15 percent, and −2 percent for the past five years. What is the variance of these returns? A) .01997 B) .02037 C) .02402 D) .01869 E) .02340 Explanation: Average return = [.16 + .04 + (−.22) + .15 + (−.02)]/5 = .022, or 2.20% Var = [(.16 − .022)2 + (.04 − .022)2 + (−.22 − .022)2 + (.15 − .022)2 + (−.02 − .022)2]/(5 − 1) = .02402

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63) A stock had returns of 8 percent, 39 percent, 11 percent, and −24 percent for the past four years. Which one of the following best describes the probability that this stock will not lose more than 43 percent in any one given year? A) 92.5 percent B) 95.0 percent C) 97.5 percent D) 84.0 percent E) 99.5 percent Explanation: Average return = [.08 + .39 + .11 + (−.24)]/4 = .085, or 8.5% SD = {[(.08 − .085)2 + (.39 − .085)2 + (.11 − .085)2 + (−.24 − .085)2]/(4 −1)}.5 = .2577, or 25.77% Lower bound95% = .085 − 2(.2577) = −.4305, or −43.05% Probability of not losing more than 43 percent in any given year is approximately 97.5 percent. 64) Over the past four years, a stock produced returns of 14 percent, 22 percent, 6 percent, and −19 percent. What is the approximate probability that an investor in this stock will not lose more than 30 percent nor earn more than 41 percent in any o...