Question 1

The probability mass between two standard deviations around the mean for a normal distribution is:

Accepted Answer

The area between two standard deviations around the mean for a normal distribution is approximately 95%. This is a well-known empirical rule called the 68-95-99.7 rule, which states that for a normal distribution, approximately 68% of the data fall within one standard deviation of the mean, approximately 95% within two standard deviations, and approximately 99.7% within three standard deviations. Therefore, choice D is correct, as it gives the closest probability to the correct answer.

Question 2

Use the table for the question(s)below.
Consider the following realized annual returns:
 
-The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

Accepted Answer

A 95% confidence interval is calculated as the mean plus or minus 1.96 times the standard deviation. Here, it is 11.7% ± (1.96 * 20.5%), which gives the interval -29.3% to 52.7%.

Question 3

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

Accepted Answer

The answer of The average annual return over the period...

Question 4

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as:

Accepted Answer

To calculate the annual realized return, we need to compound the quarterly returns. The formula for compounding returns is (1+r1)(1+r2)...(1+rn)-1, where r1, r2,...rn are the quarterly returns. Therefore, the correct formula for the annual realized return is (1+R₁)(1+R₂)(1+R₃)(1+R₄)-1, which is choice A. Choosing the other options will either overestimate or underestimate the annual realized return.

Question 5

Which type of investment has historically had the highest volatility?

Accepted Answer

The answer of Which type of investment has historically had...

Question 6

What are the two components of realized return from a stock investment?

Accepted Answer

The answer of What are the two components of realized...

Question 7

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10.5%,and the standard deviation of returns is 18.5%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

Accepted Answer

To calculate a 95% confidence interval for the returns, we use the formula: average ± (1.96 * standard deviation). Plugging in the numbers: 10.5% ± (1.96 * 18.5%) = 10.5% ± 36.26%, which gives us the interval from -25.76% to 46.76%. Rounding these to the nearest half percent gives us -26.5% to 47.5%, which matches option C.

Question 8

If asset A's return is exactly two times asset B's return,then following risk return tradeoff,the standard deviation of asset A should be ________ times the standard deviation of asset B.

Accepted Answer

According to risk return tradeoff, higher returns are associated with higher risk. Since asset A has twice the return of asset B, it must also have higher risk. Therefore, the standard deviation of asset A should be greater than the standard deviation of asset B. Since it is exactly two times, the answer is B, i.e., the standard deviation of asset A should be 2 times the standard deviation of asset B.

Question 9

Use the table for the question(s)below.
Consider the following realized annual returns:
 
-The average annual return on IBM from 1996 to 2005 is closest to:

Accepted Answer

To find the average annual return, we need to sum up all the returns and divide by the number of years:

Average return = (5+3+20+16-5-9+12+20+11+35)/10 = 18.6

Therefore, the closest answer choice is B) 16.40%.

Question 10

Use the table for the question(s)below.
Consider the following realized annual returns:
 
-The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 67% confidence interval for 2010 returns?

Accepted Answer

A 67% confidence interval for a normally distributed variable can be calculated as the mean plus or minus the standard deviation. Here, the mean (average annual return) is 11.7%, and the standard deviation is 20.5%. Therefore, the 67% confidence interval is 11.7% ± 20.5%, which gives us -8.8% to 32.2%.

Question 11

Use the table for the question(s)below.
Consider the following price and dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your dividend yield for this period is closest to:

Accepted Answer

To calculate the dividend yield, we need to divide the dividend per share by the price per share.

Dividend per share = $0.10 
Price per share on Dec 31, 2004 = $14.44 
Price per share on Jan 26, 2005 = $13.58

Dividend yield = (Dividend per share/Price per share)*100 
Dividend yield = ($0.10/$14.44)*100 = 0.69% (rounded to 0.70%)

Therefore, the closest dividend yield for this period is 0.70%, which is option C.

Question 12

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 12%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

Accepted Answer

Using the formula for a 95% confidence interval, which is the mean ± 1.96 * standard deviation, we calculate: 12% ± 1.96 * 20% = 12% ± 39.2%, which gives us a range of -27.2% to 51.2%. This range is closest to the option A) -28%, 52%.

Question 13

Use the table for the question(s)below.
Consider the following price and dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your capital gains rate (yield)for this period is closest to:

Accepted Answer

To calculate the capital gain rate, we need to first calculate the total return of the stock. 
Total Return = (Price on January 26 - Price on December 31 + Dividend) / Price on December 31
Total Return = (14.03-14.10+0.10)/14.10 = -0.49%
Since the total return is negative, the capital gain rate is also negative. Therefore, the closest answer is -8.80%.

Question 14

The Ishares Bond Index fund (TLT)has a mean and annual standard deviation of returns of 7% and 10%,respectively.What is the 66% confidence interval for the returns on TLT?

Accepted Answer

The 66% confidence interval can be calculated as the mean +/- 1 standard deviation. Using the given mean and annual standard deviation, we get:
Lower bound = 7% - (1 x 10%) = -3%
Upper bound = 7% + (1 x 10%) = 17%
Therefore, the 66% confidence interval for TLT returns is -3% to 17%. The correct answer choice is C.

Question 15

Use the table for the question(s)below.
Consider the following price and dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your total return rate (yield)for this period is closest to:

Accepted Answer

The total return rate (yield) for this period includes both the change in the stock price and the dividend received. Given the options, a negative return suggests that the stock price decreased more than the dividend could offset, leading to a negative yield close to -8.13%.

Question 16

Use the table for the question(s)below.
Consider the following realized annual returns:
 
-The average annual return on the S&P 500 from 1996 to 2005 is closest to:

Accepted Answer

The average annual return on the S&P 500 from 1996 to 2005 is 8.75%.

Question 17

If the returns on a stock index can be characterized by a normal distribution with mean 12%,the probability that returns will be lower than 12% over the next period equals:

Accepted Answer

In a normal distribution, the mean divides the distribution into two equal halves. Therefore, the probability of returns being lower than the mean (12%) is 50%.

Question 18

Treasury bill returns are 5%,4%,3%,and 6% over four years.The standard deviation of returns of Treasury bills is:

Accepted Answer

To calculate the standard deviation, first we need to find the average return (mean) which is (5%+4%+3%+6%)/4 = 4.5%. Then we can calculate the deviation of each return from the average return:

- Deviation of 5%: 5% - 4.5% = 0.5%
- Deviation of 4%: 4% - 4.5% = -0.5%
- Deviation of 3%: 3% - 4.5% = -1.5%
- Deviation of 6%: 6% - 4.5% = 1.5%

Next, we square each deviation and sum them up: (0.5%^2 + (-0.5%)^2 + (-1.5%)^2 + 1.5%^2) = 0.605%

Then we divide by the number of observations (4) minus 1, and take the square root:

sqrt(0.605%/3) = 1.29%

Therefore, the standard deviation of Treasury bill returns is 1.29%. The best choice is D.

Question 19

Use the table for the question(s)below.
Consider the following realized annual returns:
 
-The average annual return over the period 1926-2009 for small stocks is 22.1%,and the standard deviation of returns is 22.1%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

Accepted Answer

A 95% confidence interval is calculated as the mean plus or minus 1.96 times the standard deviation. Here, it is 22.1% ± (1.96 * 22.1%), which results in the interval -22.1% to 66.3%.

Question 20

Use the table for the question(s)below.
Consider the following price and dividend data for Ford Motor Company:
 
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2014 and sold it at the closing price on December 30,2015.Your realized annual return is for the year 2015 is closest to:

Accepted Answer

To calculate the realized annual return, we need to first find the total return as follows:
Total Return = (Ending Price - Beginning Price + Dividends) / Beginning Price
= (12.44 - 14.05 + 0.60) / 14.05
= -0.1042 or -10.42%
Since this is for a one-year period, the realized annual return is simply -10.42% which is closest to B) -45.1%.

Quiz 10: Risk and Return in Capital Markets

The probability mass between two standard deviations around the mean for a normal distribution is:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as:

Which type of investment has historically had the highest volatility?

What are the two components of realized return from a stock investment?

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10.5%,and the standard deviation of returns is 18.5%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

If asset A's return is exactly two times asset B's return,then following risk return tradeoff,the standard deviation of asset A should be ________ times the standard deviation of asset B.

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return on IBM from 1996 to 2005 is closest to:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 67% confidence interval for 2010 returns?

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 12%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 7% and 10%,respectively.What is the 66% confidence interval for the returns on TLT?

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return on the S&P 500 from 1996 to 2005 is closest to:

If the returns on a stock index can be characterized by a normal distribution with mean 12%,the probability that returns will be lower than 12% over the next period equals:

Treasury bill returns are 5%,4%,3%,and 6% over four years.The standard deviation of returns of Treasury bills is:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return over the period 1926-2009 for small stocks is 22.1%,and the standard deviation of returns is 22.1%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

Quiz 10: Risk and Return in Capital Markets

The probability mass between two standard deviations around the mean for a normal distribution is:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

If a stock pays dividends at the end of each quarter,with realized returns of R1,R2,R3,and R4 each quarter,then the annual realized return is calculated as:

Which type of investment has historically had the highest volatility?

What are the two components of realized return from a stock investment?

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10.5%,and the standard deviation of returns is 18.5%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

If asset A's return is exactly two times asset B's return,then following risk return tradeoff,the standard deviation of asset A should be ________ times the standard deviation of asset B.

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return on IBM from 1996 to 2005 is closest to:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 67% confidence interval for 2010 returns?

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 12%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 7% and 10%,respectively.What is the 66% confidence interval for the returns on TLT?

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return on the S&P 500 from 1996 to 2005 is closest to:

If the returns on a stock index can be characterized by a normal distribution with mean 12%,the probability that returns will be lower than 12% over the next period equals:

Treasury bill returns are 5%,4%,3%,and 6% over four years.The standard deviation of returns of Treasury bills is:

Use the table for the question(s) below. Consider the following realized annual returns: -The average annual return over the period 1926-2009 for small stocks is 22.1%,and the standard deviation of returns is 22.1%.Based on these numbers,what is a 95% confidence interval for 2010 returns?

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as: