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Exam 10: Some Lessons From Capital Market History

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Question 31

Multiple Choice

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The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the:

A) largest 20 percent of the stocks traded on the NYSE.
B) stock returns for the largest 10 percent of the publicly traded firms in the U.S.
C) returns of the 100 largest firms in the U.S.
D) returns of all of the stocks listed on the NYSE.
E) stocks of the 500 companies included in the S&P 500 index.

F) C) and D)
G) B) and D)

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Question 32

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What was the average annual risk premium on small-company stocks for the period 1926-2008?

A) 5.3 percent
B) 6.2 percent
C) 8.5 percent
D) 12.6 percent
E) 15.3 percent

F) A) and B)
G) None of the above

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Question 33

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Which one of the following has the narrowest distribution of returns for the period 1926-2008?

A stock produced returns of 16 percent, 9 percent, and 21 percent over three of the past four years. The arithmetic average for the past four years is 10 percent. What is the standard deviation of the stock's returns for the 4-year period?

Over the past 4 years, a stock produced returns of 23 percent, -39 percent, 4 percent, and 16 percent. Based on these 4 years, what range of returns would you expect to see 99 percent of the time?

Over the past 4 years, a stock produced returns of 15 percent, 6 percent, 11 percent, and 22 percent. Based on these 4 years, what range of returns would you expect to see 95 percent of the time?

You've observed the following returns on Blast It Corporation's stock over the past five years: 11 percent, -28 percent, 16 percent, 18 percent, and - 3 percent. What was the variance of the returns over this period?

Explain why investors receive exactly what they pay for in a totally efficient market.

Last year, Rita earned 11.6 percent on her investments while U.S. Treasury bills yielded 3.8 percent and the inflation rate was 3.1 percent. What real rate of return did she earn on her investments last year?

One year ago, you purchased 100 shares of a stock .This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the:

Which one of the following best describes an arithmetic average return?

The Triangle Store pays a constant dividend. Last year, the dividend yield was 5.4 percent when the stock was selling for $18 a share. What must the stock price be today if the market currently requires a 3.8 percent dividend yield on this stock?

There are regulations that prohibit "insider trading", which is the use of non-public information about a security to earn abnormal profits from trading that security. Which form of market efficiency would make these laws unnecessary? Explain why.

A stock has produced returns of 15.6 percent, 3.4 percent, 11.7 percent, and -9.2 percent over the past four years, respectively. What is the geometric average return?

For the period 1926-2008, small-company stocks had a risk premium of 12.6 percent. What does the term "risk premium" mean? Is the risk premium on these stocks considered to be relatively high or relative low as compared to other investment classes? Explain why.

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

The common stock of Western Hill Farms has yielded 16.3 percent, 7.2 percent, 11.8 percent, -3.6 percent, and 9.9 percent over the past five years, respectively. What is the geometric average return?

A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over the past 4 years, respectively. What is the standard deviation of these returns?

A bond has an average return of 6.3 percent and a standard deviation of 3.8 percent. What range of returns would you expect to see 68 percent of the time on this security?

Hilltop Garage pays a constant annual dividend. One year ago, when you purchased shares of that stock at $12 a share, the dividend yield was 2 percent. Over this past year, the inflation rate has been 2.6 percent. Today, the required return on this stock is 8 percent and you just sold all of your shares. What is your total nominal return on this investment?