Q&A Hero

Q: Asset allocation is the: A. selection of specific securities within a particular class or industry. B. division of a purchase price between a cash payment and a margin loan. C. division of a portfolio into short and long positions. D. distribution of investment funds among various broad asset classes. E. dividing of assets into those that are hypothecated and those that are not.

Q: Market timing is the: A. placing of an order within the last half-hour of trading for a day. B. period of time between the placement of a short sale and the covering of that sale. C. buying and selling of securities in anticipation of the overall direction of the market. D. staggering of either buy or sell orders to mask the total size of a large transaction. E. placing of trades within the last half-hour prior to the commencement of daily trading.

Q: 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.

Q: You have studied the historical returns and risks of various securities over the period of 1926-2012.Describe the historical returns and risks associated with bonds as compared to stocks over that time period.

Q: For the period 1926-2012, small-cap stocks outperformed large-cap stocks by a significant amount. Given this, why do investors still purchase large-cap stocks?

Q: Jim began his investing program with a $4,000 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?A. 1.6 percentB. 2.2 percentC. 2.6 percentD. 3.2 percentE. 3.6 percent

Q: Jim began his investing program with a $4050 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?A. 1.5 percentB. 1.8 percentC. 2.0 percentD. 2.2 percentE. 2.5 percent

Q: 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? A. 1.5 percent B. 2.0 percent C. 2.5 percent D. 3.0 percent E. 3.5 percent

Q: Tom decides to begin investing some portion of his annual bonus, beginning this year with $6,000. In the first year he earns a 8% return and adds $3,000 to his investment. In the second his portfolio loses 4% but, sticking to his plan, he adds $1,000 to his portfolio. In this year his portfolio returns 2%. What is Tom's dollar-weighted average return on his investments? A. 0.34 percent B. 1.20 percent C. 1.54 percent D. 2.23 percent E. 2.58 percent

Q: 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? A. 11.38 percent B. 11.41 percent C. 11.44 percent D. 11.47 percent E. 11.51 percent

Q: A stock has an average arithmetic return of 10.55 percent and an average geometric return of 10.41 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? A. 10.17 percent B. 10.21 percent C. 10.38 percent D. 10.46 percent E. 10.79 percent

Q: 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? A. 13.47 percent B. 13.67 percent C. 13.72 percent D. 13.81 percent E. 13.86 percent

Q: The geometric return on a stock over the past 10 years was 7.9 percent. The arithmetic return over the same period was 8.8 percent. What is the best estimate of the average return on this stock over the next 5 years? A. 8.40 percent B. 9.05 percent C. 9.08 percent D. 9.13 percent E. 9.47 percent

Q: A stock had year end prices of $24, $27, $32, and $26 over the past four years, respectively. What is the geometric average return? A. 2.02 percent B. 2.18 percent C. 2.55 percent D. 2.70 percent E. 2.81 percent

Q: An initial investment of $35,000 forty nine years ago is worth $1,533,913 today. What is the geometric average return on this investment? A. 7.47 percent B. 8.02 percent C. 9.23 percent D. 10.47 percent E. 11.08 percent

Q: 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? A. 7.02 percent B. 7.47 percent C. 7.59 percent D. 7.67 percent E. 7.88 percent

Q: Over the past five years, an investment produced annual returns of 16.5, 21, -18, 4, and 17 percent, respectively. What is the geometric average return? A. 6.42 percent B. 7.06 percent C. 8.00 percent D. 15.60 percent E. 16.00 percent

Q: 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? A. 5.78 percent B. 6.03 percent C. 6.34 percent D. 7.21 percent E. 8.20 percent

Q: Joanne invested $15,000 six years ago. Her arithmetic average return on this investment is 8.72 percent, and her geometric average return is 8.50 percent. What is Joanne's portfolio worth today? A. $23,989 B. $24,472 C. $26,409 D. $26,514 E. $26,766

Q: 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? A. $9,092 B. $10,623 C. $10,899 D. $10,947 E. $11,195

Q: RedStone Mines stock returned 7.5, 15.3, -9.2, and 11.5 percent over the past four years, respectively. What is the geometric average return? A. 5.84 percent B. 6.36 percent C. 7.75 percent D. 9.94 percent E. 10.33 percent

Q: 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? A. 3.17 percent B. 3.85 percent C. 4.28 percent D. 10.63 percent E. 11.79 percent

Q: An asset had annual returns of 17, -35, -18, 24, and 6 percent, respectively, over the past five years. What is the arithmetic average return? A. -1.2 percent B. 0.8 percent C. 1.2 percent D. 1.6 percent E. 2.3 percent

Q: 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? A. -5.00 percent B. 2.75 percent C. 6.25 percent D. 28.00 percent E. 32.00 percent

Q: Over the past four years, Hi-Tech Development stock returned 35.2, 38.8, 18.4, and -32.2 percent annually. What is the arithmetic average return? A. 15.05 percent B. 17.67 percent C. 20.53 percent D. 24.20 percent E. 32.25 percent

Q: 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? A. 10.99 percent B. 11.04 percent C. 11.56 percent D. 12.20 percent E. 13.80 percent

Q: Over the past four years, the common stock of JL Steel Co. produced annual returns of 6.2, 5.8, 11.2, and 13.6 percent, respectively. Treasury bills produced returns of 3.4, 3.3, 4.1, and 4.7 percent, respectively over the same period. What is the standard deviation of the risk premium on JL Steel Co. stock for this time period? A. 2.23 percent B. 2.86 percent C. 3.22 percent D. 4.46 percent E. 4.61 percent

Q: 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? A. .00298 B. .00196 C. .00396 D. .00478 E. .00528

Q: Jeremy owns a stock that has historically returned 7.5 percent annually with a standard deviation of 10.2 percent. There is only a 0.5 percent chance that the stock will produce a return greater than _____ percent in any one year. A. 20.9 B. 22.9 C. 32.2 D. 38.1 E. 54.8

Q: 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? A. -2.28 to +24.48 percent B. -6.52 to +32.92 percent C. -9.58 to +38.8 percent D. +3.34 to +23.06 percent E. +13.1 to +13.3 percent

Q: A stock has an average historical return of 11.3 percent and a standard deviation of 20.2 percent. Which range of returns would you expect to see approximately two-thirds of the time? A. -23.8 to +53.0 percent B. +4.6 to +33.8 percent C. +5.8 to +31.6 percent D. -3.9 to +32.5 percent E. -8.9 to +31.5 percent

Q: 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? A. -41.8 to +65.0 percent B. -34.4 to +53.6 percent C. -24.0 to +47.2 percent D. -6.2 to +29.4 percent E. -5.4 to +41.0 percent

Q: Downtown Industries common stock had returns of 8.2, 12.2, 11.5, and 6.3 percent, respectively, over the past four years. What is the standard deviation of these returns? A. 2.07 percent B. 2.38 percent C. 2.41 percent D. 2.59 percent E. 2.82 percent

Q: 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? A. 8.63 percent B. 9.93 percent C. 9.97 percent D. 10.11 percent E. 10.15 percent

Q: An asset had annual returns of 13, 10, -14, 3, and 36 percent, respectively, for the past five years. What is the standard deviation of these returns? A. 8.96 percent B. 16.05 percent C. 17.92 percent D. 18.09 percent E. 20.03 percent

Q: 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? A. .00173 B. .00184 C. .00216 D. .00240 E. .00259

Q: Over the past five years, Southwest Railway stock had annual returns of 10, 14, -6, 7.5, and 16 percent, respectively. What is the variance of these returns? A. .00548 B. .00685 C. .00770 D. .01370 E. .02740

Q: 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? A. .00810 B. .01013 C. .01065 D. .02038 E. .04052

Q: Over the past ten years, large-company stocks have returned an average of 10.4 percent annually, long-term corporate bonds have earned 4.6 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? A. 1.7 percent B. 3.7 percent C. 5.2 percent D. 5.8 percent E. 8.1 percent

Q: 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? A. 6.89 percent B. 7.01 percent C. 7.22 percent D. 7.34 percent E. 7.57 percent

Q: Over the past four years, Jellystone Quarry stock produced returns of 12.5, 15.1, 8.7, and 2.6 percent, respectively. For the same time period, the risk-free rate 4.7, 5.3, 3.9, and 3.4 percent, respectively. What is the arithmetic average risk premium on this stock during these four years? A. 5.13 percent B. 5.25 percent C. 5.40 percent D. 5.83 percent E. 5.97 percent

Q: 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? A. 8.20 percent B. 8.43 percent C. 8.60 percent D. 8.88 percent E. 8.97 percent

Q: A stock has an average historical risk premium of 5.6 percent. The expected risk-free rate for next year is 2.4 percent. What is the expected rate of return on this stock for next year? A. 6.50 percent B. 7.53 percent C. 8.00 percent D. 9.34 percent E. 11.70 percent

Q: 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? A. -44.69 percent B. -40.14 percent C. -33.00 percent D. -31.95 percent E. -28.07 percent

Q: Jason owned a stock for four months and earned an annualized rate of return of 11 percent. What was the holding period return? A. 2.37 percent B. 2.42 percent C. 2.46 percent D. 2.64 percent E. 2.72 percent

Q: 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? A. 17.00 percent B. 21.45 percent C. 25.50 percent D. 26.55 percent E. 28.00 percent

Q: You purchased a stock eight months ago for $36 a share. Today, you sold that stock for $41.50 a share. The stock pays no dividends. What was your annualized rate of return? A. 23.32 percent B. 24.77 percent C. 25.70 percent D. 26.03 percent E. 27.67 percent

Q: 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? A. 11.98 percent B. 14.78 percent C. 19.78 percent D. 21.29 percent E. 27.20 percent

Q: Shane purchased a stock this morning at a cost of $13 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 8 percent rate of return on this investment? A. $12.38 B. $12.60 C. $12.88 D. $13.77 E. $14.28

Q: 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? A. $37.55 B. $38.00 C. $38.24 D. $39.00 E. $40.20

Q: Christine owns a stock that dropped in price from $38.70 to $34.10 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? A. -11.31 percent B. -10.49 percent C. -9.91 percent D. -9.59 percent E. -8.51 percent

Q: 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? A. $1,008 B. $1,860 C. $2,712 D. $3,211 E. $3,400

Q: A stock sold for $25 at the beginning of the year. The end of year stock price was $25.70. What is the amount of the annual dividend if the total return for the year was 7.7 percent? A. $1.23 B. $1.38 C. $1.60 D. $1.81 E. $2.31

Q: 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? A. $42.78 B. $50.62 C. $51.93 D. $52.08 E. $57.54

Q: One year ago, you purchased 300 shares of Southern Cotton at $32.60 a share. During the past year, you received a total of $280 in dividends. Today, you sold your shares for $35.80 a share. What is your total return on this investment? A. 8.79 percent B. 9.64 percent C. 10.16 percent D. 11.64 percent E. 12.68 percent

Q: 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? A. -6.03 percent B. -5.88 percent C. -4.86 percent D. 6.25 percent E. 7.34 percent

Q: One year ago, you purchased 400 shares of stock at a cost of $8,650. The stock paid an annual dividend of $1.10 per share. Today, you sold those shares for $23.90 each. What is the capital gains yield on this investment? A. 9.96 percent B. 10.52 percent C. 12.49 percent D. 13.33 percent E. 14.75 percent

Q: You purchased a stock for $29.40 a share, received a dividend of $0.72 per share, and sold the stock after one year for $31.30 a share. What was your dividend yield on this investment? A. 2.30 percent B. 2.38 percent C. 2.45 percent D. 2.67 percent E. 2.80 percent

Q: One year ago, you purchased 100 shares of Southern Foods common stock for $42.20 a share. Today, you sold your shares for $39.70 a share. During this past year, the stock paid $1.40 in dividends per share. What is your dividend yield on this investment? A. 3.32 percent B. 3.37 percent C. 3.44 percent D. 3.53 percent E. 3.61 percent

Q: Blume's formula is used to: A. predict future rates of return. B. convert an arithmetic average return into a geometric average return. C. convert a geometric average return into an arithmetic average return. D. measure past performance in a consistent manner. E. compute the historical mean return over a multi-year period of time.

Q: The geometric return on an investment is approximately equal to the arithmetic return:A. plus half the standard deviation.B. plus half the variance.C. minus half the standard deviation.D. minus half the variance.E. divided by two.

Q: 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: A. positive but less than the geometric average return. B. less than the geometric return and could be negative, zero, or positive. C. equal to the geometric average return. D. either equal to or greater than the geometric average return. E. greater than the geometric average return.

Q: The geometric mean return on large-company stocks for the 1926-2012 period:A. is approximately equal to the arithmetic mean return plus one-half of the standard deviation.B. exceeds the arithmetic mean return.C. is approximately equal to the arithmetic mean return minus one-half of the standard deviation.D. is approximately equal to the arithmetic mean return plus one-half of the variance.E. is less than the arithmetic mean return.

Q: 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? A. arithmetic average return for the period B. geometric average return for the period C. total return for the period divided by N - 1 D. arithmetic average return for the period divided by N - 1 E. geometric average return for the period divided by N - 1

Q: 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. A. higher; higher B. higher; lower C. lower; higher D. lower; lower E. The distribution of returns does not affect the expected average rate of return.

Q: Which one of the following statements is correct? A. The standard deviation of the returns on Treasury bills is zero. B. Large-company stocks are historically riskier than small-company stocks. C. The variance is a means of measuring the volatility of returns on an investment. D. A risky asset will always have a higher annual rate of return than a riskless asset. E. There is an indirect relationship between risk and return.

Q: 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: A. decrease the investment in stocks and increase the investment in bonds. B. replace the corporate bonds with intermediate-term government bonds. C. replace the corporate bonds with Treasury bills. D. increase the standard deviation of the portfolio. E. reduce the expected volatility of the portfolio.

Q: The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution. A. 50 B. 68 C. 82 D. 90 E. 95

Q: For the period 1926-2012, 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. A. exceeded; was less than B. exceeded; equaled C. exceeded; exceeded D. was less than; exceeded E. was less than; was less than

Q: Which one of the following had the smallest standard deviation of returns for the period 1926-2012? A. large-company stocks B. small-company stocks C. long-term government bonds D. intermediate-term government bonds E. long-term corporate bonds

Q: Which one of the following had the greatest volatility of returns for the period 1926-2012? A. large-company stocks B. U.S. Treasury bills C. long-term government bonds D. small-company stocks E. long-term corporate bonds

Q: Which one of the following had the narrowest bell curve for the period 1926-2012? A. large-company stocks B. long-term corporate bonds C. long-term government bonds D. small-company stocks E. U.S. Treasury bills

Q: The average risk premium on long-term corporate bonds for the period 1926-2012 was: A. 2.4 percent. B. 2.9 percent. C. 3.3 percent. D. 3.7 percent. E. 3.9 percent.

Q: The average risk premium on large-company stocks for the period 1926-2012 was: A. 6.7 percent. B. 8.0 percent. C. 8.5 percent. D. 12.3 percent. E. 13.6 percent.

Q: Based on the period of 1926-2012, the risk premium for small-company stocks averaged: A. 12.3 percent. B. 13.9 percent. C. 15.0 percent. D. 16.8 percent. E. 17.4 percent.

Q: Based on the period 1926-2012, the risk premium for U.S. Treasury bills was: A. 0.0 percent. B. 1.2 percent. C. 2.0 percent. D. 2.4 percent. E. 2.7 percent.

Q: Which one of the following had the highest risk premium for the period 1926-2012? A. U.S. Treasury bills B. long-term government bonds C. large-company stocks D. small-company stocks E. intermediate-term government bonds

Q: For the period 1926-2012, the annual return on large-company stocks: A. was negative following every three-year period of positive returns. B. was only negative for two or more consecutive years during the Great Depression. C. remained negative for at least two consecutive years anytime that it was negative. D. never exceeded a positive 30 percent nor lost more than 20 percent. E. was unpredictable based on the prior year's performance.

Q: Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2012? A. only large-company stocks B. both large-company and small-company stocks C. only small-company stocks D. corporate bonds, large-company stocks, and small-company stocks E. No category earned an annual return in excess of 100 percent for any given year during the period

Q: Which one of the following statements is correct based on the historical returns for the period 1926-2012? A. For the period, Treasury bills yielded a higher rate of return than long-term government bonds. B. The inflation rate exceeded the rate of return on Treasury bills during some years. C. Small-company stocks outperformed large-company stocks every year during the period. D. Bond prices, in general, were more volatile than stock prices. E. For the period, large-company stocks outperformed small-company stocks.