Question 1

Use the following two statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.
i.Ex post returns are expected returns while ex ante returns are future returns.
i.Risk is the possibility of incurring harm.

Accepted Answer

Statement I is correct as ex post returns refer to actual returns realized in the past, while ex ante returns are expected returns for the future. Statement II is incorrect as risk is not only the possibility of incurring harm but also uncertainty about future outcomes, which can result in both positive and negative outcomes.

Question 2

Which of the following is NOT a true statement?
A) The capital gain yield measures the appreciation in the price of the asset from some starting price.
B) Common shares should lose from inflation over the long run as their prices and cash flows are not fixed.
C) The capital loss yield measures the depreciation in the price of the asset from the purchase price.
D) The addition of the capital gain (or loss) yield explains why the yield gap between equities and bonds has varied so much over time.

Accepted Answer

Common shares may actually perform well over the long run due to their potential for growth and increasing cash flows.

Question 3

You made an investment in your RRSP account of $3,000 in an ETF that pays quarterly dividends.The price of each unit the day of the investment is $60.The following year you invested another $2,000 in your RRSP account at a price of $ 70 a unit.How much would you have in your account two years after your initial investment if you know that the income yield of the ETF is 5% and an ETF unit is trading at $75 today?
A) $6500.00
B) $6292.86
C) $5992.86
D) $6042.86

Accepted Answer

First, let's calculate the number of units you bought with each investment:
- With $3,000 at $60 per unit, you bought 50 units ($3,000 / $60).
- With $2,000 at $70 per unit, you bought 28.57 units ($2,000 / $70 = 28.57).

Next, let's calculate the dividends you received each year:
- In the first year, you received 5% of $3,000, which is $150. Since the dividends are paid quarterly, you received $37.50 every quarter. In total, you received $150 in dividends that year, which means you received $3 per unit ($150 / 50 units).
- In the second year, you received 5% of $5,000 (the initial $3,000 and the additional $2,000), which is $250. You received $62.50 per quarter, for a total of $250 in dividends that year. Since you now have 78.57 units ($50 + 28.57), you received $3.18 per unit ($250 / 78.57 units).

After two years, the value of your account is:
- The value of your initial investment after two years is $75 per unit * 50 units = $3,750.
- The value of your additional investment after two years is $75 per unit * 28.57 units = $2,143.25.
- You also received $400 in dividends over two years (2 years * 4 quarters * $37.50 per quarter).

Adding all of these together, you have $6,293.25 in your account after two years.

Therefore, the best choice is B, with a final balance of $6,293.25.

Question 4

Steve bought a share of Toronto Skates Inc.three years ago for $45.00.He was paid two annual dividends of $4.50 in the past two years.If the stock price today is $ 48.50,calculate the three year's income yield,capital gain,and total return.
A) IY=7.78%, CGY=20.00%, TR=27.78%
B) IY=20.00%, CGY=9.26%, TR=29.26%
C) IY=20.00%, CGY=7.78%, TR=27.78%
D) IY=7.78%, CGY=9.26%, TR=17.04%

Accepted Answer

TR = IY+CGY = 27.78%

Question 5

Suppose you have a total return of 8 percent on the 500 shares of XYZ Company that you bought for $9,590 last year.XYZ paid four equal quarterly dividends during the year.What would be the quarterly dividend if the current stock price is $18.64 per share?
A) $0.50
B) $0.52
C) $0.54
D) $0.56

Accepted Answer

Compute purchase price,P₀= $9,590/500 = $19.18 Dividend is (1.08 x $9,590)- (500 x $18.64)all divided by 2,000 (which is 500 x 4 quarters)= $0.5186

Question 6

A share of Oedipus Construction Company was selling for $32.16 one year ago.The stock paid an annual dividend of $0.25 during the year.What is the capital gain yield if the current stock price is $34.02?
A) 9.45%
B) 5.78%
C) 7.77%
D) 5.46%

Accepted Answer

Capital gain yield = ($34.02-$32.16)/$32.16 = 0.0578 F1S1S1W1F1F1F10 5.78%

Question 7

Steve bought a share of Toronto Skates Inc.three years ago for $45.00.He was paid two annual dividends of $4.50 in the past two years.If the stock price today is $ 48.50,what is the annual holding period return of the stock?
A) 7.78%
B) 15.56%
C) 27.78%
D) 9.26%

Accepted Answer

{[(48.5-45)+4.5+4.5]/45}x⅓ = 9.26%

Question 8

The capital gain yield of an equity security is 9.27 percent.The security paid a quarterly dividend of $0.55 per share during the year.What is the current price of the security if the total return is 13.76 percent?
A) $12.25
B) $13.38
C) $49.00
D) $53.54

Accepted Answer

Compute income yield,11ea8229_348e_6b22_bbd8_232cdd6ef028_TB1726_11 Last year's price,P₀ = $0.55*4/4.49% = $49 and Current price,P₁ = $49*(1+9.27%)= $53.54

Question 9

Which of the following is NOT a correct statement about income yield?
A) It is one of the two components of the total return on an investment.
B) It is the return earned in the form of a periodic cash flow received by the investors.
C) These periodic cash flows are interest payments from bonds and dividends from equities.
D) It measures the periodic cash receipts by dividing it by the selling price of the security.

Accepted Answer

Income yield is typically calculated by dividing the periodic cash receipts by the purchase price of the security, not the selling price.

Question 10

Connie bought 400 shares of ABC Company for $9,288 one year ago.ABC paid a quarterly dividend of $0.40 per share throughout the year,and is currently trading at $24.85 per share.What are the income yield,capital gain yield,and total return for Connie's investment?
A) Income yield = 6.44%; capital gain yield = 6.56%; total return = 13.00%
B) Income yield = 6.56%; capital gain yield = 6.44%; total return = 13.00%
C) Income yield = 6.89%; capital gain yield = 7.02%; total return = 13.91%
D) Income yield = 7.02%; capital gain yield = 6.89%; total return = 13.91%

Accepted Answer

Income yield,IY = $0.4*4/$23.22 = 6.89%,Capital gain yield,CGY = ($24.85-$23.22)/$23.22 = 7.02% Total return,TR = 6.89% + 7.02% = 13.91%

Question 11

Which of the following is a FALSE statement?
A) Paper losses are capital losses that people accept as losses before they actually sell and realize them.
B) A day trader is someone who buys and sells based on intraday price movements.
C) Mark to market refers to carrying securities at the current market value regardless of whether they are sold or not.
D) The total return including the paper gains and losses over the relevant investment horizon reflects the economic value of past investment decisions.

Accepted Answer

Paper losses are unrealized losses on securities that have not yet been sold. They are not accepted as losses until the securities are actually sold and the losses are realized.

Question 12

A stock selling for $12.00 today and expected to pay a $1.50 dividend and have a capital gain of 5% in one year will increase in price to sell at:
A) $ 13.50
B) $ 14.10
C) $ 12.60
D) $ 15.18

Accepted Answer

$12(1+0.05)= $12.6

Question 13

Laura purchased a share of MVP Company for $26.43 one year ago.The stock paid a quarterly dividend of $0.50 during the year.What is the capital gain yield if the current stock price is $28.26?
A) 6.48%
B) 6.92%
C) 7.57%
D) 14.49%

Accepted Answer

Capital gain yield = ($28.26-$26.43)/$26.43 = 6.92%

Question 14

In question 18 above,what is the income yield (dividend yield)for the stock of Oedipus Construction Company?
A) 0.945%
B) 0.578%
C) 0.777%
D) 0.546%

Accepted Answer

Income yield = $0.25/$32.16 = 0.00777 F1S1S1W1F1F1F10 0.777%

Question 15

The income yield and capital gain yield of a stock are 4.90 percent and 7.37 percent,respectively.The stock paid a quarterly dividend of $0.65 per share during the year.What should the stock sell for today?
A) $35.28
B) $37.01
C) $53.06
D) $56.97

Accepted Answer

Compute last year price,P₀ = $0.65*4/4.9% = $53.06

Question 16

A stock selling for $20.00 today and expected to have an income (dividend)yield of 3% and a capital gain yield of 5% in one year will increase in price to sell at:
A) $21.60
B) $20.60
C) $21.00
D) $20.40

Accepted Answer

$20(1+0.05)= $21.00

Question 17

A year ago,you bought some shares of CIA Company,which pays equal quarterly dividends.The income yield and the capital gain yield are 4.38 percent and 9.5 percent,respectively.The current price of CIA is $18.What was the quarterly dividend that CIA paid during the year?
A) $0.18
B) $0.41
C) $0.72
D) $1.64

Accepted Answer

Compute last year price,P₀ = $18/(1+9.5%)= $16.4384 Dividend is ($16.4384 x 0.0438)/4 = $0.18

Question 18

Melanie bought a share of MPT Company for $53.98 one year ago.The stock paid a quarterly dividend of $0.52 throughout the year.What is the income yield if the stock is selling for $57.10 today?
A) 0.91%
B) 0.96%
C) 3.85%
D) 3.64%

Accepted Answer

Income yield,IY = ($0.52*4)/ $53.98 = 3.85%

Question 19

Sandy paid $47.38 for one share of EMH Company one year ago.The stock paid four quarterly dividends of $1.00 each during the year,and is selling for $49.50 now.What are the income yield and capital gain yield for EMH over the past year?
A) Income yield = 4.28%; capital gain yield = 8.08%
B) Income yield = 8.08%; capital gain yield = 4.28%
C) Income yield = 4.47%; capital gain yield = 8.44%
D) Income yield = 8.44%; capital gain yield = 4.47%

Accepted Answer

Income yield,Y = $1*4/$47.38 = 8.44%,And capital gain yield,CGY = ($49.5-$47.38)/$47.38 = 4.47%

Question 20

Which of the following statements is TRUE?
A) The geometric mean measures the average annual rates of return while the arithmetic mean measures the compound growth rate over multiple time periods.
B) The more the returns vary, the bigger the difference between the arithmetic and geometric mean will be. The difference is dependent on the relevant investment horizon.
C) The geometric mean is appropriate when we are trying to estimate the typical return for a given period.
D) The arithmetic mean is a better average return estimate when we are interested in the rate of return performance of an investment over time.

Accepted Answer

B) is true because the geometric mean is less than the arithmetic mean when there is variability in the rates of return, reflecting the compounding effect over time. The difference between them increases with the volatility of the returns, not the investment horizon.

Quiz 8: Risk, return, and Portfolio Theory

Use the following two statements to answer this question:

Which of the following is NOT a true statement?

Steve bought a share of Toronto Skates Inc.three years ago for $45.00.He was paid two annual dividends of $4.50 in the past two years.If the stock price today is $ 48.50,calculate the three year's income yield,capital gain,and total return.

Suppose you have a total return of 8 percent on the 500 shares of XYZ Company that you bought for $9,590 last year.XYZ paid four equal quarterly dividends during the year.What would be the quarterly dividend if the current stock price is $18.64 per share?

A share of Oedipus Construction Company was selling for $32.16 one year ago.The stock paid an annual dividend of $0.25 during the year.What is the capital gain yield if the current stock price is $34.02?

Steve bought a share of Toronto Skates Inc.three years ago for $45.00.He was paid two annual dividends of $4.50 in the past two years.If the stock price today is $ 48.50,what is the annual holding period return of the stock?

The capital gain yield of an equity security is 9.27 percent.The security paid a quarterly dividend of $0.55 per share during the year.What is the current price of the security if the total return is 13.76 percent?

Which of the following is NOT a correct statement about income yield?

Connie bought 400 shares of ABC Company for $9,288 one year ago.ABC paid a quarterly dividend of $0.40 per share throughout the year,and is currently trading at $24.85 per share.What are the income yield,capital gain yield,and total return for Connie's investment?

Which of the following is a FALSE statement?

A stock selling for $12.00 today and expected to pay a $1.50 dividend and have a capital gain of 5% in one year will increase in price to sell at:

Laura purchased a share of MVP Company for $26.43 one year ago.The stock paid a quarterly dividend of $0.50 during the year.What is the capital gain yield if the current stock price is $28.26?

In question 18 above,what is the income yield (dividend yield) for the stock of Oedipus Construction Company?

The income yield and capital gain yield of a stock are 4.90 percent and 7.37 percent,respectively.The stock paid a quarterly dividend of $0.65 per share during the year.What should the stock sell for today?

A stock selling for $20.00 today and expected to have an income (dividend) yield of 3% and a capital gain yield of 5% in one year will increase in price to sell at:

A year ago,you bought some shares of CIA Company,which pays equal quarterly dividends.The income yield and the capital gain yield are 4.38 percent and 9.5 percent,respectively.The current price of CIA is $18.What was the quarterly dividend that CIA paid during the year?

Melanie bought a share of MPT Company for $53.98 one year ago.The stock paid a quarterly dividend of $0.52 throughout the year.What is the income yield if the stock is selling for $57.10 today?

Sandy paid $47.38 for one share of EMH Company one year ago.The stock paid four quarterly dividends of $1.00 each during the year,and is selling for $49.50 now.What are the income yield and capital gain yield for EMH over the past year?

Which of the following statements is TRUE?