Finance Final

true

On average, stocks have delivered higher returns than bonds in the long run

true

In the United States over the long term, small stocks have provided the highest return followed by the large stocks in the S&P 500.

are averse to

Rational investors \________ fluctuations in the value of their investments.

A) are averse to
B) prefer
C) are indifferent to
D) are in favor of

high variability

Stocks with high returns are expected to have \________.

A) high variability
B) low variability
C) no relation to variability
D) inverse relationship with variability

higher, higher

Historically, stocks have delivered a \________ return on average compared to Treasury bills but have experienced \________ fluctuations in values.

A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower

they do not like risk

Investors demand a higher return for investments that have larger fluctuations in values because \________.

A) they do not like risk
B) they are risk seeking
C) they invest for the long term
D) they prefer fluctuations

Treasury bills

Which of the following investments offered the lowest overall return over the past eighty years?

A) small stocks
B) Treasury bills
C) S&P 500
D) corporate bonds

small stocks

Which of the following investments offered the highest overall return over the past eighty years?

A) Treasury bills
B) S&P 500
C) small stocks
D) corporate bonds

small stocks

Which of the following investments had the largest fluctuations overall return over the past eighty years?

A) small stocks
B) S&P 500
C) corporate bonds
D) Treasury bills

9.38%

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65 . What was your return on the investment?

A) 6.57%
B) 7.51%
C) 9.38%
D) 10.32 %

12.51%

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66 . What was your return on the investment?

A) 8.76%
B) 13.76 %
C) 12.51%
D) 10.01 %

-15.94 %

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66 . What was your return on the investment?

A) -20.72 %
B) -15.94 %
C) -18.33%
D) -17.53 %

-87.50 %

Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Gregʹs return on his investment?

A) -87.50 %
B) -113.75 %
C) -100.62 %
D) -96.25 %

47.83 %

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed?

A) 47.83 %
B) 33.48 %
C) 50.22%
D) 45.43%

0.57%, 1.08%

Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94 . What was your dividend yield and capital gains yield on the investment?

A) 0.54%, 1.13%
B) 0.57%, 1.08%
C) 0.57%, 1.13%
D) 1.08%, 1.18%

2%, 0%

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?

A) 2%, 2%
B) 0%, 2%
C) 3%, 2%
D) 2%, 0%

2%, -5%

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95 . What was your dividend yield and capital gains yield on the investment?

A) 2%, -5%
B) 2%, 5%
C) -2%, 5%
D) 5%, 2%

$108.57

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?

A) $119.43
B) $103.14
C) $108.57
D) $114.00

-1.46%

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) -1.46%
B) 2.91%
C) 0.00%
D) 1.46%

-4.45%

Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) -4.45%
B) -7.12%
C) -5.12%
D) 0%

67.30 %

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

A) 60.57 %
B) 67.30 %
C) 53.84%
D) 74.03 %

-4.49%

IGM Realty had stock prices of $33 , $33 , $38 , $36 , and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM?

A) -5.62%
B) -4.49%
C) -4.72%
D) -4.94%

-100%

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is \________.

A) -99%
B) -75%
C) -150%
D) -100%

8.75%

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years?

A) 10.50 %
B) 13.13 %
C) 8.75%
D) 9.63%

2.50%

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?

A) 3.00%
B) 3.50%
C) 2.25%
D) 2.50%

0%

The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years?

A) -5%
B) 0%
C) 5%
D) 3%

4.73%

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is \________.

A) 4.49%
B) 5.68%
C) 4.02%
D) 4.73%

16.57 %

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is \________.

A) 8.28%
B) 12.43 %
C) 14.08%
D) 16.57 %

lower than

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be \________ the geometric average return of stock B when their arithmetic average returns are same.

A) same as
B) higher than
C) lower than
D) always same as

11.67 %

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is \________.

A) 15.17 %
B) 11.67 %
C) 12.83%
D) 16.33 %

8.65%

The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is \________.

A) 9.08%
B) 8.65%
C) 8.22%
D) 9.52%

$42.96

Bear Stearnsʹ stock price closed at $98 , $103 , $58 , $29 , $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is \________.

A) $30.07
B) $49.40
C) $42.96
D) $34.37

5.77%

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample?

A) 5.77%
B) 5.20%
C) 6.06%
D) 4.62%

15.00%

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford?

A) 12.75 %
B) 14.25 %
C) 13.50%
D) 15.00%

27.39%

Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford?

A) 24.65 %
B) 32.86 %
C) 27.39%
D) 30.12 %

I and III

The standard deviation of returns of \________.

I. small stocks is higher than that of large stocks
II. large stocks is lower than that of corporate bonds
III. corporate bonds is higher than that of Treasury bills

Which statement is true?

A) I and III
B) I, II, and III
C) I and II
D) I only

1.29%

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is \________.

A) 1.55%
B) 1.03%
C) 0.90%
D) 1.29%

2

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

A) 3
B) 2
C) 1
D) 4

50%

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 \________.

A) 50%
B) 25%
C) 46%
D) 33%

95%

The probability mass between two standard deviations around the mean for a normal distribution is \________.

A) 66%
B) 90%
C) 75%
D) 95%

-5%, 15%

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT?

A) -7%, 10%
B) 5%, 10%
C) -5%, 15%
D) -10%, 10%

-25%, 35%

The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns?

A) -12.5%, 17.5%
B) -15%, 25%
C) -25%, 35%
D) -25%, 25%

-35%, 65%

The average annual return for the S&P 500 from 1886 to 2006 is 15%, with a standard deviation of 25%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns?

A) -35%, 65%
B) -17.5%, 32.5%
C) -25%, 55%
D) -20%, 50%

-26.5%, 45.5%

The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns?

A) -13.25 %, 22.75 %
B) -16.5%, 35.5%
C) -26.5%, 45.5%
D) -11.5%, 30.5%

The geometric average return will always be above the arithmetic average return, and the
difference grows with the volatility of the annual returns.

(the geometric average return will always be BELOW the arithmetic average return, and the difference grows with the volatility of the annual returns.)

Which of the following statements is FALSE?

A) The geometric average return is a better description of the long-run historical performance of an investment.

B) The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns.

C) The compounded geometric average return is most often used for comparative purposes.

D) We should use the arithmetic average return when we are trying to estimate an
investmentʹs expected return over a future horizon based on its past performance.

Rannual \= (1 + R1) (1 + R2) (1 + R3)( 1 + R4) - 1

(\#37 page 412)

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 \________.

A) Rannual \= (1 + R1) (1 + R2) (1 + R3)( 1 + R4) - 1

B) Rannual \= R1 + R2 + R3 + R4

C) Rannual \= (1 + R1) (1 + R2)( 1 + R3)( 1 + R4)

D)Rannual\= R1+R2+R3+R4/4

0.74%

Assume that you purchased Quicksilverʹs 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 \________.

A) -7.80%
B) -8.53%
C) 0.74%
D) 0.81%

-3.85%

Assume that you purchased Quicksilverʹs 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 \________.

A) 0.93%
B) 1.02%
C) -3.85%
D) -2.93%

-4.00%

Assume that you purchased Quicksilverʹs 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 \________.

A) 0.97%
B) -4.00%
C) -4.97%
D) 1.06%

-45.1%

Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it at the closing price on December 30, 2005. Your realized annual return for the year 2005 is closest to \________.

A) -47.4%
B) -45.1%
C) -42.9%
D) -40.6%

8.68%

Consider the following realized annual returns:

The average annual return on the S&P 500 from 1996 to 2005 is closest to \________.

A) 8.68%
B) 4.34%
C) 5.21%
D) 9.55%

16.07%

Consider the following realized annual returns:

The average annual return on IBM from 1996 to 2005 is closest to \________.

A) 18.48%
B) 16.07%
C) 19.28%
D) 28.93%

-30.6%, 54.6%

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

A) -1.5%, 21.8%
B) -10.7%, 32.8%
C) -30.6%, 54.6%
D) -30.6%, 76.4%

-8.6%, 34.2%

The average annual return over the period 1926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns?

A) -1.3%, 20.5%
B) -8.6%, 34.2%
C) -25.8%, 54.7%
D) -25.8%, 47.9%

-21.2%, 63.6%

The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

A) -10.6%, 31.8%
B) 0%, 42.4%
C) -21.2%, 42.4%
D) -21.2%, 63.6%

42.38 %

McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52 . What was your realized return from holding McCoy?

A) 4.24%
B) 6.36%
C) 33.91%
D) 42.38 %

33.89%

McCoy paid a one-time special dividend of $3.20 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $62.93 . What was your capital gain yield from holding McCoy?

A) 4.07%
B) 6.11%
C) 33.89%
D) 40.70 %

False

Rational investors may be willing to choose an investment that has additional risk but does not offer additional reward.

True

Historical evidence on the returns of large portfolios of stock and bonds shows that investments with higher volatility have rewarded investors with higher returns.

False

There is a clear link between the volatility of returns for individual stocks and the returns for individual stocks.

volatility, volatility

While \________ seems to be a reasonable measure of risk when evaluating a large portfolio, the \________ of an individual security does not explain the size of its average return.

A) volatility, volatility
B) the mean return, standard deviation
C) mode, volatility
D) mode, mean return

size, risk

There is an overall relationship between \________ and \________. Larger stocks have a lower volatility overall.

A) size, risk
B) mean, standard deviation
C) risk aversion, size
D) volatility, mean

Treasury bills

The excess return is the difference between the average return on a security and the average return for \________.

A) Treasury bonds
B) a portfolio of securities with similar risk
C) a broad-based market portfolio like the S&P 500 index
D) Treasury bills

Smaller stocks have lower volatility than larger stocks.

(smaller stocks have HIGHER volatility than larger stocks)

Which of the following statements is FALSE?

A) Expected return should rise proportionately with volatility.

B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return.

C) Smaller stocks have lower volatility than larger stocks.

D) The largest stocks are typically more volatile than a portfolio of large stocks.

Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.

(Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the volatility does not explain the size of returns of individual securities.)

Which of the following statements is FALSE?

A) Investments with higher volatility have rewarded investors with higher average returns.

B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns.

C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.

D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

19.5%

Consider the following average annual returns:

What is the excess return for the portfolio of small stocks?

A) 11.7%
B) 16.6%
C) 19.5%
D) 17.6%

9.3%

Consider the following average annual returns:

What is the excess return for the S&P 500?

A) 11.5%
B) 16.3%
C) 0%
D) 9.3%

2.6%

Consider the following average annual returns:

What is the excess return for corporate bonds?

A) 2.6%
B) 1.3%
C) 5.2%
D) 0%

0%

Consider the following average annual returns:

What is the excess return for Treasury bills?

A) 0%
B) -9.1%
C) -3.2%
D) -2.4%

On average, larger stocks have higher volatility than smaller stocks.

Which of the following statements is FALSE?

A) On average, larger stocks have higher volatility than smaller stocks.

B) Portfolios of large stocks are typically less volatile than individual large stocks.

C) On average, smaller stocks have higher returns than larger stocks.

D) On average, Treasury Bills have lower returns than corporate bonds.

Portfolios of smaller stocks are typically less volatile than individual small stocks.

Which of the following statements is TRUE?

A) On average, smaller stocks have lower volatility than Treasury bills.

B) Portfolios of smaller stocks are typically less volatile than individual small stocks.

C) On average, smaller stocks have lower returns than larger stocks.

D) On average, Treasury bills have higher returns than stocks.

True

The risk that inflation rates are likely to increase in the next year is an example of common risk.

True

A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, because the independent risks are averaged out. This is also referred to as diversification of risks.

not perfectly positively correlated

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are \________.

A) not perfectly positively correlated
B) perfectly correlated
C) susceptible to common risks only
D) both B and C

Machine A

Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on \________.

A) Machine A
B) Machine B
C) does not matter
D) none of the above

common risk

The risk that is linked across outcomes is called \________.

A) diversifiable risk
B) common risk
C) uncorrelated risk
D) independent risk

$400 million

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $100 million in net income. The probability of the
FDA approving a drug is 40%.

What is the expected payoff for Big Cureʹs blockbuster drug?

A) $100 million
B) $0
C) $1 billion
D) $400 million

$250 million

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $50 million in net income. The probability of the FDA
approving a drug is 50%.

What is the expected payoff for Little Cureʹs ten drugs?

A) $250 million
B) $50 million
C) $1 billion
D) $0

True

Independent risks can be diversified by holding a large number of uncorrelated assets with independent risks.

False

A stock whose return does not depend on overall economic conditions has a low systematic risk.

False

Investors should earn a risk premium for bearing unsystematic risk.

unsystematic

In general, it is possible to eliminate \________ risk by holding a large portfolio of assets.

A) unsystematic
B) systematic
C) unsystematic and systematic
D) market specific

unsystematic risk

A companyʹs stock price jumped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of \________.

A) market risk
B) unsystematic risk
C) systematic risk
D) undiversifiable risk

decreases

As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio \________.

A) increases
B) remains unchanged
C) decreases
D) doubles

do not require a risk premium for bearing it

Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they \________.

A) do not require a risk premium for bearing it
B) require a risk premium for bearing it
C) are indifferent about credit spread and risk premium
D) do not require a credit spread

systematic, unsystematic

The risk premium of a security is determined by its \________ risk and does not depend on its \________ risk.

A) systematic, undiversifiable
B) systematic, unsystematic
C) undiversifiable, diversifiable
D) diversifiable, undiversifiable

cumulative, average

When investing for a long term, investors care about the volatility of \________ returns and not the volatility of \________ returns.

A) average, cumulative
B) cumulative, average
C) mean, cumulative
D) mean, average

unsystematic

Many former employees at AlphaEnergy, an energy trading and supply company, had a large part of their portfolio invested in AlphaEnergyʹs stock. These employees were bearing a high degree of \________ risk.

A) unsystematic
B) systematic
C) market-specific
D) non-diversifiable

the risk that oil prices rise, increasing production costs

Which of the following is NOT a diversifiable risk?

A) the risk that oil prices rise, increasing production costs
B) the risk that the CEO is killed in a plane crash
C) the risk of a key employee being hired away by a competitor
D) the risk of a product liability lawsuit

the risk that your new product will not receive regulatory approval

Which of the following is NOT a systematic risk?

A) the risk that oil prices rise, increasing production costs
B) the risk that the economy slows, reducing demand for your firmʹs products
C) the risk that your new product will not receive regulatory approval
D) the risk that the Federal Reserve raises interest rates

systematic risk

Fluctuations of a stockʹs return that are due to market-wide news representing common risk is the \________.

A) idiosyncratic risk
B) systematic risk
C) unique risk
D) unsystematic risk

unsystematic risk

The risk premium of a stock is NOT affected by its \________.

A) undiversifiable risk
B) market risk
C) systematic risk
D) unsystematic risk

Fluctuations of a stockʹs return that are due to firm-specific news are common risks.

(Fluctuations of a stock's return that are due to firm-specific news are NOT common risks)

Which of the following statements is FALSE?

A) The risk premium of a security is determined by its systematic risk and does not depend
on its diversifiable risk.

B) When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified.

C) Fluctuations of a stockʹs return that are due to firm-specific news are common risks.

D) The volatility in a large portfolio will decline until only the systematic risk remains.

-20%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 20% probability that they will have a 20% return and a 80% probability that they will have a -30% return.

What is the expected return for an individual firm?

A) -12%
B) -20%
C) 10%
D) 20%

24.49%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to \________.

A) 24.49 %
B) -10.00 %
C) 12.25%
D) 9.80%

22.91%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on an portfolio of 20 type S firms is closest to \________.

A) 13.75 %
B) 22.91 %
C) 5.00%
D) 4.58%

5.48%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 60% probability that the firm will have a 20% return and a 40% probability that the firm will have a -30% return.
The standard deviation for the return on a portfolio of 20 type I firms is closest to \________.

A) 0.00%
B) 12.25 %
C) 5.48%
D) 24.49 %

systematic risk

If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of \________.

A) unsystematic risk
B) systematic risk
C) independent risk
D) diversification risk

unsystematic risk

Independent risk is more closely related to \________.

A) unsystematic risk
B) systematic risk
C) common risk
D) diversification risk

unsystematic risk

The risk premium of a stock is not affected by its \________.

A) undiversifiable risk
B) typical risk
C) systematic risk
D) unsystematic risk