Question 1

The geometric return on an investment is approximately equal to the arithmetic return:
A)plus half the standard deviation.
B)plus half the variance.
C)minus half the standard deviation.
D)minus half the variance.
E)divided by two.

Accepted Answer

The geometric return on an investment is approximately equal to the arithmetic return minus half the variance. This is because the geometric return accounts for the compounding effect over time, which is not captured by the arithmetic return. The variance, which measures the dispersion of returns, affects the geometric return by reducing it, hence the subtraction of half the variance.

Question 2

You purchased a stock for $46.70 a share and resold it one year later.Your total return for the year was 11.2 percent and the dividend yield was 2.8 percent.At what price did you resell the stock?
A)$42.78
B)$50.62
C)$51.93
D)$52.08
E)$57.54

Accepted Answer

Capital gains yield = 11.2 percent - 2.8 percent = 8.4 percent$46.70 × (1 + .084) = $50.62

Question 3

Shane purchased a stock this morning at a cost of $13 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 8 percent rate of return on this investment?
A)$12.38
B)$12.60
C)$12.88
D)$13.77
E)$14.28

Accepted Answer

.08 = (P₁ - $13 + $.27)/$13; P₁ = $13.77

Question 4

Christine owns a stock that dropped in price from $38.70 to $34.10 over the past year.The dividend yield on that stock is 1.4 percent.What is her total return on this investment for the year?
A)-11.31 percent
B)-10.49 percent
C)-9.91 percent
D)-9.59 percent
E)-8.51 percent

Accepted Answer

[($34.10 - $38.70)/$38.70] + .014 = -10.49 percent

Question 5

Eight months ago,you purchased 300 shares of a non-dividend paying stock for $27 a share.Today,you sold those shares for $31.59 a share.What was your annualized rate of return on this investment?
A)17.00 percent
B)21.45 percent
C)25.50 percent
D)26.55 percent
E)28.00 percent

Accepted Answer

HPR = ($31.59 - $27)/$27 = .17Annualized rate of return = (1 + .17)^12/8 - 1 = 26.55 percent

Question 6

You have owned a stock for seven years.The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly.Given this,you know the arithmetic average return for the period is:
A)positive but less than the geometric average return.
B)less than the geometric return and could be negative, zero, or positive.
C)equal to the geometric average return.
D)either equal to or greater than the geometric average return.
E)greater than the geometric average return.

Accepted Answer

The arithmetic average return is typically greater than the geometric average return when there are significant variations in the annual rates of return. The geometric average accounts for the compounding effect over time, which can be lower than the arithmetic average that simply sums up the annual returns and divides by the number of periods.

Question 7

You purchased a stock for $29.40 a share,received a dividend of $0.72 per share,and sold the stock after one year for $31.30 a share.What was your dividend yield on this investment?
A)2.30 percent
B)2.38 percent
C)2.45 percent
D)2.67 percent
E)2.80 percent

Accepted Answer

$0.72/$29.40 = 2.45 percent

Question 8

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?
A)11.98 percent
B)14.78 percent
C)19.78 percent
D)21.29 percent
E)27.20 percent

Accepted Answer

1 + EAR = (1 + .062)^12/4 - 1 = 19.78 percent

Question 9

Jason owned a stock for four months and earned an annualized rate of return of 11 percent. What was the holding period return?
A)2.37 percent
B)2.42 percent
C)2.46 percent
D)2.64 percent
E)2.72 percent

Accepted Answer

Annualized return = (1 + x)^12/4 - 1 = .11; x = 1.11^1/3 - 1; x = HPR = 2.64 percent

Question 10

One year ago,you purchased 300 shares of Southern Cotton at $32.60 a share.During the past year,you received a total of $280 in dividends.Today,you sold your shares for $35.80 a share. What is your total return on this investment?
A)8.79 percent
B)9.64 percent
C)10.16 percent
D)11.64 percent
E)12.68 percent

Accepted Answer

[$35.80 - $32.60 + ($280/300)]/$32.60 = 12.68 percent

Question 11

One year ago,you purchased 100 shares of Southern Foods common stock for $42.20 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?
A)3.32 percent
B)3.37 percent
C)3.44 percent
D)3.53 percent
E)3.61 percent

Accepted Answer

$1.40/$42.20 = 3.32 percent

Question 12

You have been researching a company and have estimated that the firm's stock will sell for $44 a share one year from now.You also estimate the stock will have a dividend yield of 2.18 percent. How much are you willing to pay per share today to purchase this stock if you desire a total return of 15 percent on your investment?
A)$37.55
B)$38.00
C)$38.24
D)$39.00
E)$40.20

Accepted Answer

.15 = [($44 - P₀)/P₀] + .0218; P₀ = $39

Question 13

A stock sold for $25 at the beginning of the year.The end of year stock price was $25.70.What is the amount of the annual dividend if the total return for the year was 7.7 percent?
A)$1.23
B)$1.38
C)$1.60
D)$1.81
E)$2.31

Accepted Answer

($25.70 - $25 + D)/$25 = .077; D = $1.23

Question 14

Today,you sold 800 shares of Sky High Inc.,for $57.60 a share.You bought the shares one year ago at a price of $61.20 a share.Over the year,you received a total of $500 in dividends.What is your capital gains yield on this investment?
A)-6.03 percent
B)-5.88 percent
C)-4.86 percent
D)6.25 percent
E)7.34 percent

Accepted Answer

($57.60 - $61.20)/$61.20 = -5.88 percent

Question 15

Todd purchased 600 shares of stock at a price of $68.20 a share and received a dividend of $1.42 per share.After six months,he resold the stock for $71.30 a share.What was his total dollar return?
A)$1,008
B)$1,860
C)$2,712
D)$3,211
E)$3,400

Accepted Answer

600 × ($71.30 - $68.20 + $1.42) = $2,712

Question 16

You purchased a stock eight months ago for $36 a share.Today,you sold that stock for $41.50 a share. The stock pays no dividends.What was your annualized rate of return?
A)23.32 percent
B)24.77 percent
C)25.70 percent
D)26.03 percent
E)27.67 percent

Accepted Answer

HPR = ($41.50 - $36)/$36 = .062Annualized rate of return = (1 + .062)^12/8 - 1 = 23.32 percent

Question 17

Scott purchased 200 shares of Frozen Foods stock for $48 a share.Four months later,he received a dividend of $0.22 a share and also sold the shares for $42 each.What was his annualized rate of return on this investment?
A)-44.69 percent
B)-40.14 percent
C)-33.00 percent
D)-31.95 percent
E)-28.07 percent

Accepted Answer

HPR = ($42 - $48 + $0.22)/$48 = -.120417Annualized return = (1 - .120417)^12/4 - 1 = -31.95 percent

Question 18

A stock has an average historical risk premium of 5.6 percent.The expected risk-free rate for next year is 2.4 percent.What is the expected rate of return on this stock for next year?
A)6.50 percent
B)7.53 percent
C)8.00 percent
D)9.34 percent
E)11.70 percent

Accepted Answer

Expected return = 5.6 percent + 2.4 percent = 8.0 percent

Question 19

One year ago,you purchased 400 shares of stock at a cost of $8,650.The stock paid an annual dividend of $1.10 per share.Today,you sold those shares for $23.90 each.What is the capital gains yield on this investment?
A)9.96 percent
B)10.52 percent
C)12.49 percent
D)13.33 percent
E)14.75 percent

Accepted Answer

[($23.90 × 400) - $8,650)]/$8,650 = 10.52 percent

Question 20

Blume's formula is used to:
A)predict future rates of return.
B)convert an arithmetic average return into a geometric average return.
C)convert a geometric average return into an arithmetic average return.
D)measure past performance in a consistent manner.
E)compute the historical mean return over a multi-year period of time.

Accepted Answer

The answer of Blume's formula is used to:
A)predict future rates...

Quiz 1: A Brief History of Risk and Return

The geometric return on an investment is approximately equal to the arithmetic return:

You purchased a stock for $46.70 a share and resold it one year later.Your total return for the year was 11.2 percent and the dividend yield was 2.8 percent.At what price did you resell the stock?

Shane purchased a stock this morning at a cost of $13 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 8 percent rate of return on this investment?

Christine owns a stock that dropped in price from $38.70 to $34.10 over the past year.The dividend yield on that stock is 1.4 percent.What is her total return on this investment for the year?

Eight months ago,you purchased 300 shares of a non-dividend paying stock for $27 a share.Today,you sold those shares for $31.59 a share.What was your annualized rate of return on this investment?

You have owned a stock for seven years.The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly.Given this,you know the arithmetic average return for the period is:

You purchased a stock for $29.40 a share,received a dividend of $0.72 per share,and sold the stock after one year for $31.30 a share.What was your dividend yield 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?

Jason owned a stock for four months and earned an annualized rate of return of 11 percent. What was the holding period return?

One year ago,you purchased 300 shares of Southern Cotton at $32.60 a share.During the past year,you received a total of $280 in dividends.Today,you sold your shares for $35.80 a share. What is your total return on this investment?

One year ago,you purchased 100 shares of Southern Foods common stock for $42.20 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?

A stock sold for $25 at the beginning of the year.The end of year stock price was $25.70.What is the amount of the annual dividend if the total return for the year was 7.7 percent?

Today,you sold 800 shares of Sky High Inc.,for $57.60 a share.You bought the shares one year ago at a price of $61.20 a share.Over the year,you received a total of $500 in dividends.What is your capital gains yield on this investment?

Todd purchased 600 shares of stock at a price of $68.20 a share and received a dividend of $1.42 per share.After six months,he resold the stock for $71.30 a share.What was his total dollar return?

You purchased a stock eight months ago for $36 a share.Today,you sold that stock for $41.50 a share. The stock pays no dividends.What was your annualized rate of return?

Scott purchased 200 shares of Frozen Foods stock for $48 a share.Four months later,he received a dividend of $0.22 a share and also sold the shares for $42 each.What was his annualized rate of return on this investment?

A stock has an average historical risk premium of 5.6 percent.The expected risk-free rate for next year is 2.4 percent.What is the expected rate of return on this stock for next year?

One year ago,you purchased 400 shares of stock at a cost of $8,650.The stock paid an annual dividend of $1.10 per share.Today,you sold those shares for $23.90 each.What is the capital gains yield on this investment?

Blume's formula is used to: