BUS 405 Week 1 Chapter 1 A Brief History of Risk and Return

This pack of BUS 405 Week 1 Chapter 1 A Brief History of Risk and Return contains:

1. The total dollar return on a share of stock is defined as the:

2. The dividend yield is defined as the annual dividend expressed as a percentage of the:

3. The capital gains yield is equal to:

4. When the total return on an investment is expressed on a per-year basis it is called the:

5. The risk-free rate is:

6. The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the:

7. The risk premium is defined as the rate of return on:

8. The additional return earned for accepting risk is called the:

9. The standard deviation is a measure of:

10. A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n):

11. The arithmetic average return is the:

12. The average compound return earned per year over a multiyear period is called the:

13. The average compound return earned per year over a multiyear period when inflows and outflows are considered is called the:

14. Which one of the following statements is correct concerning the dividend yield and the total return?

15. An annualized return:

16. Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before reselling it.

17. Capital gains are included in the return on an investment:

18. When we refer to the rate of return on an investment, we are generally referring to the:

19. Which one of the following should be used to compare the overall performance of three different investments?

20. If you multiply the number of shares of outstanding stock for a firm by the price per share, you are computing the firm's:

21. Which one of the following is considered the best method of comparing the returns on various- sized investments?

22. Which one of the following had the highest average return for the period 1926-2006?

23. Which one of the following statements is correct based on the historical returns for the period 1926-2009?

24. Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2009?

25. For the period 1926-2009, the annual return on large-company stocks:

26. Which one of the following had the highest risk premium for the period 1926-2009?

27. Based on the period 1926-2006, the risk premium for U.S. Treasury bills was:

28. Based on the period of 1926-2009, the risk premium for small-company stocks averaged:

29. The average risk premium on large-company stocks for the period 1926-2009 was:

30. The average risk premium on long-term corporate bonds for the period 1926-2009 was:

31. Which one of the following had the narrowest bell curve for the period 1926-2009?

32. Which one of the following had the greatest volatility of returns for the period 926-2009?

33. Which one of the following had the smallest standard deviation of returns for the period 1926-2009?

34. For the period 1926-2009, long-term government bonds had an average return that ______ the average return on long-term corporate bonds while having a standard deviation that _______ the standard deviation of the long-term corporate bonds.

35. The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution.

36. Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:

37. Which one of the following statements is correct?

38. The wider the distribution of an investment's returns over time, the _____ the expected average rate of return and the ______ the expected volatility of those returns.

39. Which one of the following should be used as the mean return when you are defining the normal distribution of an investment's annual rates of return?

40. The geometric mean return on large-company stocks for the 1926-2009 period:

41. 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:

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

43. BLOOM'S formula is used to:

44. One year ago, you purchased 100 shares of Southern Foods common stock for $40.7 a share.

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

46. One year ago, you purchased 300 shares of stock at a cost of $7,521. The stock paid an annual dividend of $1.10 per share. Today, you sold those shares for $28.20 each. What is the capital gains yield on this investment?

47. 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?

48. One year ago, you purchased 400 shares of Southern Cotton at $38.40 a share. During the past year, you received a total of $480 in dividends. Today, you sold your shares for $41.10 a share. What is your total return on this investment?

49. 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?

50. A stock sold for $30 at the beginning of the year. The end of year stock price was $30.50. What is the amount of the annual dividend if the total return for the year was 7.7 percent?

51. 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?

52. Christine owns a stock that dropped in price from $42.40 to $37.20 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?

53. 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?

54. Shane purchased a stock this morning at a cost of $11 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 15 percent rate of return on this investment?

55. 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?

56. You purchased a stock five months ago for $40 a share. Today, you sold that stock for $44 a share. The stock pays no dividends. What was your annualized rate of return?

57. 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?

58. Jason owned a stock for three months and earned an annualized rate of return of 10.02 percent. What was the holding period return?

59. 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?

60. A stock has an average historical risk premium of 6.4 percent. The expected risk-free rate for next year is 2.6 percent. What is the expected rate of return on this stock for next year?

61. Last year, ABC stock returned 11.4 percent, the risk-free rate was 3.2 percent, and the inflation rate was 2.8 percent. What was the risk premium on ABC stock?

62. Over the past four years, Sandstone Quarry stock produced returns of 12.6, 15.2, 9.8, and 2.7 percent, respectively. For the same time period, the risk-free rate 4.6, 5.2, 3.8, and 3.4 percent, respectively. What is the arithmetic average risk premium on this stock during these four years?

63. Over the past five years, Teen Clothing stock produced returns of 18.7, 5.8, 7.9, 10.8, and 11.6 percent, respectively. For the same five years, the risk-free rate 5.2, 3.4, 2.8, 3.4, and 3.9 percent, respectively. What is the arithmetic average risk premium on Teen Clothing stock for this time period?

64. Over the past ten years, large-company stocks have returned an average of 11.6 percent annually, long-term corporate bonds have earned 6.4 percent, and U. S. Treasury bills have returned 3.2 percent. How much additional risk premium would you have earned if you had invested in large-company stocks rather than long-term corporate bonds over those ten years?

65. An asset had annual returns of 12, 18, 6, -9, and 5 percent, respectively, for the last five years. What is the variance of these returns?

66. Over the past five years, Northern Railway stock had annual returns of 11, 15, -5, 8.5, and 18 percent, respectively. What is the variance of these returns?

67. An asset had returns of 6.8, 5.4, 3.6,-4.2, and -1.3 percent, respectively, over the past five years. What is the variance of these returns?

68. An asset had annual returns of 14, 11, -15, 2, and 37 percent, respectively, for the past five years. What is the standard deviation of these returns?

69. Over the past four years, a stock produced returns of 13, 6, -5, and 18 percent, respectively. What is the standard deviation of these returns?

70. Uptown Industries common stock had returns of 9.2, 11.3, 10.6, and 5.4 percent, respectively, over the past four years. What is the standard deviation of these returns?

71. An asset has an average annual historical return of 11.6 percent and a standard deviation of 17.8 percent. What range of returns would you expect to see 95 percent of the time?

72. A stock has an average historical return of 14.3 percent and a standard deviation of 18.2 percent. Which range of returns would you expect to see approximately two-thirds of the time?

73. An asset has an average historical rate of return of 13.2 percent and a variance of .00972196. What range of returns would you expect to see approximately two-thirds of the time?

74. Jeremy owns a stock that has historically returned 8.5 percent annually with a standard deviation of 11.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year.

75. Jefferson Mills stock produced returns of 14.8, 22.6, 5.9, and 9.7 percent, respectively, over the past four years. During those same years, U.S. Treasury bills returned 3.8, 4.6, 4.8, and 4.0 percent, respectively, for the same time period. What is the variance of the risk premiums on Jefferson Mills stock for these four years?

76. Over the past four years, the common stock of JL Steel Co. produced annual returns of 7.2, 4.8, 10.2, and 12.6 percent, respectively. During those same years, U.S. Treasury bills returned 3.2, 3.4, 4.2, and 4.5 percent, respectively. What is the standard deviation of the risk premium on JL Steel Co. stock for this time period?

77. Big Town Markets common stock returned 13.8, 14.2, 9.7, 5.3, and 12.2 percent, respectively, over the past five years. What is the arithmetic average return?

78. Over the past four years, Hi-Tech Development stock returned 36.1, 42.9, 15.4, and -33.2 percent annually. What is the arithmetic average return?

79. You own a stock that has produced an arithmetic average return of 7.8 percent over the past five years. The annual returns for the first four years were 16, 11, -19, and 3 percent, respectively. What was the rate of return on the stock in year five?

80. An asset had annual returns of 19, -38, -17, 25, and 5 percent, respectively, over the past five years. What is the arithmetic average return?

81. Celsius stock had year end prices of $42, $37, $44, and $46 over the past four years, respectively. What is the arithmetic average rate of return?

82. Black Stone Mines stock returned 8, 16, -8, and 12 percent over the past four years, respectively. What is the geometric average return?

83. You invested $5,000 eight years ago. The arithmetic average return on your investment is 10.6 percent and the geometric average return is 10.23 percent. What is the value of your portfolio today?

84. Jeanette invested $12,000 four years ago. Her arithmetic average return on this investment is 8.72 percent, and her geometric average return is 8.31 percent. What is Jeanette's portfolio worth today?

85. A stock produced annual returns of 5, -21, 11, 42, and 4 percent over the past five years, respectively. What is the geometric average return?

86. Over the past five years, an investment produced annual returns of 17, 22, -19, 3, and 15 percent, respectively. What is the geometric average return?

87. A portfolio had an original value of $7,400 seven years ago. The current value of the portfolio is $11,898. What is the average geometric return on this portfolio?

88. An initial investment of $25,000 forty years ago is worth $1,533,913 today. What is the geometric average return on this investment?

89. A stock had year end prices of $24, $27, $32, and $26 over the past four years, respectively. What is the geometric average return?

90. The geometric return on a stock over the past 10 years was 8.42 percent. The arithmetic return over the same period was 9.02 percent. What is the best estimate of the average return on this stock over the next 5 years?

91. The geometric return on an asset over the past 12 years has been 13.47 percent. The arithmetic return over the same period was 13.86 percent. What is the best estimate of the average return on this asset over the next 5 years?

92. A stock has an average arithmetic return of 12.55 percent and an average geometric return of 12.40 percent based on the annual returns for the last 15 years. What is projected average annual return on this stock for the next 10 years?

93. Lisa owns a stock that has an average geometric return of 11.34 percent and an average arithmetic return of 11.51 percent over the past six years. What average annual rate of return should Lisa expect to earn over the next four years?

94. Tom decides to begin investing some portion of his annual bonus, beginning this year with $5,000. In the first year he earns a 10% return and adds $3,500 to his investment. In the second his portfolio loses 5% but, sticking to his plan, he adds $500 to his portfolio. In this year his portfolio returns 2%. What is Tom's dollar-weighted average return on his investments?

95. Bill has been adding funds to his investment account each year for the past 3 years. He started with an initial investment of $1,000. After earning a 10% return the first year, he added $3,000 to his portfolio. In this year his investments lost 5%. Undeterred, Bill added 2,000 the next year and earned a 2% return. Last year, discouraged by the recent results, he only added $500 to his portfolio, but in this final year his investments earned 8%. What was Bill's dollar-weighted average return for his investments?

96. Jim began his investing program with a $4000 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar-weighted average return?

97. Jim began his investing program with a $4000 initial investment. The table below recaps his returns each year as well as the amounts he added to his investment account. What is his dollar- weighted average return?

98. For the period 1926-2009, small-cap stocks outperformed large-cap stocks by a significant amount. Given this, why do investors still purchase large-cap stocks?

99. You have studied the historical returns and risks of various securities over the period of 1926-2009. Describe the historical returns and risks associated with bonds as compared to stocks over that time period.

100. We have studied three different "average return measures" - the arithmetic average return, the geometric average return and the dollar-weighted average return. Briefly outline what information each metric provides.