Chapter 10 Investment Returns and Aggregate Measures of
Stock Markets
TRUE/FALSE
value–weighted or geometric averages.
income.
include a relatively small number of stocks.
the annual rate of return was 20 percent.
change but not dividend income.
price changes.
using relative (percentage) price changes instead of
absolute price changes.
percentage changes instead of absolute price changes.
than the S&P 500 index.
prices.
gains.
not comparable to the S&P 500.
that the stocks of small companies generate higher returns
than the stocks of larger companies.
can expect to earn at least 15 percent annually.
Associates studies of investment returns) determined that
large–cap stocks in the S&P earned higher returns than the
smaller companies.
dollar investments.
more securities when their prices rise.
good money after bad.
the price of the stock subsequently rises.
in the prices of small stocks than the stocks of large
companies.
not give an accurate measure of the true rate of return.
the true annualized rate of return.
than the S&P 500 stock index.
income is reinvested at the current dividend yield.
Dividend income is not reinvested.
MULTIPLE CHOICE
a. a value–weighted index
b. a simple average
c. a geometric index
d. an exponential index
measure of stock prices?
a. Nasdaq market index
b. Dow Jones industrial average
c. S&P 500 stock index
d. Russell 3000
annual rate of return
a. was 20 percent
b. was greater than 20 percent
c. was less than 20 percent
d. cannot be determined
the investor needs to know
1. income received
2. the cost of an investment
3. the sale price of the investment
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. dividend payments and capital gains
b. cash outflows and subsequent cash inflows
c. initial cash outflow and the sale price
d. dividend payments and the investment’s cost
a. a simple average
b. a compound average
c. a geometric average
d. a value–weighted average
a. combines 1000 stocks and bonds
b. uses the 1000 largest Nasdaq stocks
c. is a broad measure of listed and over–the–counter
(Nasdaq) stocks
d. is a broad–based measure of bonds
stocks suggest
a. the average return is about 6.4 percent annually
b. over a period of years, the rate approximates
9-10 percent
c. equity investors rarely sustain losses
d. dividends account for over half the return
a. periodically buying a round lot of stock
b. periodically investing a specified dollar amount
in a stock
c. a means to increase the average cost basis
d. a means to insure a positive return
a. the price of the stock continues to fall
b. the firm pays more dividends
c. the firm retains earnings
d. the price of the stock subsequently rises
a. positively correlated
b. positively correlated with inflation
c. negatively correlated
d. positively correlated with changes in interest
rates
PROBLEMS
1. You bought a stock for $20 and sold it for $59.72 after
six years. What was the annual rate of return?
2. You bought a stock for $28.29 that paid the following
dividends
Year 1 2 3
Dividend $1.00 $1.50 $1.80
After the third year, you sold the stock for $35. What was
the annual rate of return?
3. a. Given the following information concerning three
stocks, construct a simple average, a value–weighted
average, and a geometric average.
Stock Price Shares Outstanding
A $10 1,000,000
B $14 3,000,000
C $21 10,000,000
b. What are averages if each price rises to $11, $17, and
$35, respectively?
c. What is the percentage increase in each average?
4. The market consists of the following stocks. Their
prices and number of shares are as follows:
Stock Price Number of Shares Outstanding
A $10 100,000
B 20 10,000
C 30 200,000
D 40 50,000
a. The price of Stock C doubles to $60. What is the
percentage increase in the market if a S&P 500 type of
measure of the market (value–weighted average) is used?
b. Repeat question (a) but use a Value Line type of measure
of the market (i.e., a geometric average) to determine the
percentage increase.
c. Suppose the price of stock B doubled instead of stock C.
How would the market have fared using the aggregate
measures employed in (a) and (b)? Why are your answers
different?
5. You sold 200 shares of DOG short for $24. After three
years you closed your position at $17. DOG paid an annual
dividend of $1, what was the annualized (compound) return
on the trade?
SOLUTIONS TO PROBLEMS
