Question 1

Assume the return on large-company stocks is currently 11.5 percent.The risk premium on large-company stocks is 8.6 percent and the inflation rate is 2.4 percent.What is the current risk-free rate of return?

Accepted Answer

Risk-free rate = 11.5% - 8.6% = 2.9%

Question 2

Suppose you own a risky asset with an expected return of 16.3 percent and a standard deviation of 31.3 percent.If the returns are normally distributed,the approximate probability of losing 15 percent or more in a single year is ____ percent.

Accepted Answer

Lower point of 68.26% probability range = 16.3% - 31.3% = -15%Approximate probability of losing 15 percent or more = (100% - 68.26%)/2 = 15.87%

Question 3

Assume a $1 investment in a stock 36 years ago is now worth $54.82.What is the geometric average return for the period?

Accepted Answer

Geometric average return = 54.82^1/36 - 1 = .1176,or 11.76%

Question 4

How does the payment of a dividend affect the total return on a stock?

Accepted Answer

The answer of How does the payment of a dividend...

Question 5

Assume you purchased 400 shares of stock for $20 a share,sold the stock for $8,392 and received a total of $550 in dividends.What was total dollar capital gain and total dollar return?

Accepted Answer

Total capital gain in dollars = $8,392 - (400 × $20)= $392Total return in dollars = $550 + 392 = $942

Question 6

Assume that for a 10-year period inflation averaged 2.8 percent,U.S.Treasury bills returned 3.3 percent,and long-term corporate bonds earned 5.9 percent.What was the real rate of return on long-term corporate bonds for the period?

Accepted Answer

Risk premium = 5.9% - 2.8% = 3.1%

Question 7

Assume a $1 investment in a stock 65 years ago is now worth $211.46.What is the geometric average return for the period?

Accepted Answer

Geometric average return = 211.46^1/65 - 1 = .0859,or 8.59%

Question 8

The annual returns for KLO stock for the last three years are 11.2 percent,16.4 percent and 3.8 percent.Assuming no dividends were paid,what was the 3-year holding period return?

Accepted Answer

HPR = (1.112 × 1.164 × 1.038)- 1 = .3436,or 34.36%

Question 9

The price of a stock for Years 1 through 4 was $23.19,$24.00,$23.18,and $24.86,respectively.The stock paid dividends per share of $.23,$.24,and $.25 for Years 2 through 4,respectively.What is the geometric average rate of return for the period?

Accepted Answer

Geometric return = ({1 + [($24.00 - 23.19 + .23)/$23.19]} × {1 + [($23.18 - 24.00 + .24)/$24.00]} × {1 + [($24.86 - 23.18 + .25)/$23.18]})^1/3 - 1 = .034,or 3.4%

Question 10

Exo shares are currently selling for $25.75 each.You bought 200 shares one year ago at $24 a share and received dividend payments of $1.60 a share.What is the percentage capital gain for the period?

Accepted Answer

Capital gain = ($25.75 - 24)/$24 = .0729,or .7.29%

Question 11

One year ago,Ted purchased 100 shares of stock at $18.79 a share.Today,he received a total of $130 in dividends and sold his shares for a total of $1,211.What was his total rate of return?

Accepted Answer

Rate of return = [($1,211 + 130 - (100 × $18.79)]/(100 × $18.79)= -.2863,or -28.63%

Question 12

The return pattern on your favorite stock has been 9 percent,8 percent,-2 percent,15 percent,and 21 percent over the last five years.What is the stock's arithmetic average return and holding period return?

Accepted Answer

Average return = (.09 + .08 - .02 + .15 + .21)/5 = .1020,or 10.20%HPR = (1.09 × 1.08 × .98 × 1.15 ×1.21)- 1 = .6053,or 60.53%

Question 13

Alpha shares are currently selling for $28.09 a share.Alice bought 200 shares one year ago at a price of $25.20 a share and received total dividend payments of $1.25 a share.What was her total rate of return?

Accepted Answer

Total Return = ($28.09 - 25.20 + 1.25)/$25.20 = .1643,or 16.43%

Question 14

Kurt's Toy Co.has had total annual returns for the past five years of -5 percent,8 percent,-3 percent,20 percent,and 12 percent.What is the 5-year holding period return?

Accepted Answer

Holding period return = [.95 × 1.08 × .97 × 1.20 × 1.12] - 1 = 33.76%

Question 15

Assume inflation averaged 3.2 percent during a period in which U.S.Treasury bills earned 4.3 percent.What was the average real rate of return on large-company stocks if the risk premium on those stocks was 7.4 percent for the period?

Accepted Answer

Nominal return on large-company stocks = 4.3% + 7.4% = 11.7%Real return on large-company stocks = 11.7% - 3.2% = 8.5%

Question 16

Assume the market portfolio of common stocks earned 14.1 percent in one year while U.S.Treasury bills earned 4.4 percent and inflation averaged 4.6 percent.What was the market risk premium?

Accepted Answer

Market risk premium = 14.1% - 4.4% = 9.7%

Question 17

For the period 1926-2012 U.S.Treasury bills had an average return of 3.6 percent and inflation averaged 3.1 percent.U.S.Treasury bills had an approximate real rate of return of _____ percent and a risk premium of _____ percent.

Accepted Answer

Real return = 3.6% - 3.1% = .5%Risk premium = 16.5% - 16.5% = 0%

Question 18

The arithmetic average return on your portfolio for the past five years was 8.4 percent.Assume you earned -6 percent,25 percent,10 percent,and 6 percent for four of those five years.What rate of return did you earn in the fifth year?

Accepted Answer

Arithmetic average = .084 = (-.06 + .25 + .10 + .06 + R)/5R = .070,or 7.0%

Question 19

For the period 1926-2012 small-company stocks had an average return of 16.5 percent.U.S.Treasury bills returned 3.6 percent and inflation averaged 3.1 percent.Small-company stocks had an approximate real rate of return of _____ percent and a risk premium of _____ percent.

Accepted Answer

Real return = 16.5% - 3.1% = 13.4%Risk premium = 16.5% - 3.6% = 12.9%

Question 20

A stock earned a real average arithmetic rate of return of 5.65 percent for a 4-year period.During that period inflation averaged 3.6 percent while U.S.Treasury bills returned 4.2 percent.Assume the stock had annual nominal returns of 8 percent,13 percent and 12 percent for three of the four years.What nominal rate of return did the stock earn in the fourth year?

Accepted Answer

Nominal average return on the stock = .0565 + .036 = .0925Nominal average return on the stock = .0925 = (.08 + .13 + .12 + R)/4R = .04,or 4.00%

Quiz 10: Risk and Return Lessons From Market History