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Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 11 Risk and Return in Capital Markets
11.1 A First Look at Risk and Return
1) On average, stocks have delivered higher returns than bonds in the long run.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
2) 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.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3) Rational investors ________ luctuations in the value of their investments.
A) are averse to
B) prefer
C) are indiferent to
D) are in favor of
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
4) Stocks with high returns are expected to have ________.
A) high variability
B) low variability
C) no relation to variability
D) inverse relationship with variability
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
1
5) Historically, stocks have delivered a ________ return on average compared to Treasury
bills but have experienced ________ luctuations in values.
A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
6) Investors demand a higher return for investments that have larger luctuations in values
because ________.
A) they do not like risk
B) they are risk seeking
C) they invest for the long term
D) they prefer luctuations
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) Which of the following investments ofered the lowest overall return over the past eighty
years?
A) small stocks
B) Treasury bills
C) S&P 500
D) corporate bonds
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
2
8) Which of the following investments ofered the highest overall return over the past
eighty years?
A) Treasury bills
B) S&P 500
C) small stocks
D) corporate bonds
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
9) Which of the following investments had the largest luctuations overall return over the
past eighty years?
A) small stocks
B) S&P 500
C) corporate bonds
D) Treasury bills
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
11.2 Historical Risks and Returns of Stocks
1) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3
2) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
4) 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 Greg's return
on his investment?
A) -87.50%
B) -113.75%
C) -100.62%
D) -96.25%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
4
5) You own shares in Supernova Inc. that were purchased at a price of $23 per share.
Quicksilver Inc. has ofered 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
6) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
5
8) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
9) 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
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
10) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
6
11) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
12) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7
13) IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last ive
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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
14) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
8
15) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
16) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
17) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
9
18) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
19) 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%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
20) 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
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
10
