Chapter 11 Test bank – Static Key
1.
A market index is used to measure performance of a broad-based portfolio of stocks.
2.
Stock market indexes are found in many countries outside the United States.
3.
Long-term bonds are the only portfolio of securities found to be riskier than common stocks.
4.
For investment horizons greater than 20 years, long-term bonds traditionally have outperformed common stocks.
5.
The S&P 500 accounts for most of the total market value of stocks traded in the United States.
6.
The expected return on an investment includes compensation for both the time value of money and the risks assumed.
7.
If one portfolio’s variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other
portfolio.
8.
The market risk premium is the difference between the return on common stocks and the risk-free interest rate.
9.
Market risk can be eliminated in a stock portfolio through diversification.
10.
Macro risks are faced by all common stock investors.
11.
The risk that remains in a well-diversified stock portfolio is known as specific risk.
12.
Cyclical stocks tend to perform well when other stocks are performing well also.
13.
Average returns on high-risk assets are higher than those on low-risk assets.
14.
The historical record fails to show that investors have received a risk premium for holding risky assets.
15.
Many investors who bought shares of dot.com stocks in March 2000 saw the value of their investment decline over the next
two-and-a-half years.
16.
Every additional stock added to a portfolio reduces the portfolio’s level of risk by an equal amount.
17.
The expected return on an investment provides compensation to investors both for waiting and for worrying.
18.
One estimate of the market risk premium is provided by the difference between the average historical return on common
stocks and the risk-free interest rate.
19.
When using historical data to estimate the market risk premium, it is important to focus on recent experience.
20.
A share of stock currently sells for $60, pays an annual dividend of $4.00, and earned a rate of return of 20% over the past
year. What did this stock sell for one year ago?
21.
Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What
nominal rate of return did she earn?
22.
What is the percentage return on a stock that was purchased for $48.40, paid a $1.67 dividend, and was then sold after one
year for $46.20?
23.
What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year
for $39.00?
24.
An investor receives a 15% total return by purchasing a stock for $40 and selling it after one year with a 5% capital gain.
How much was received in dividend income during the year?
25.
How is it possible for real rates of return to increase during times when the rate of inflation increases?
26.
What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%?
27.
Real rates of return are typically less than nominal rates of return due to:
28.
If a share of stock provided a 14.84% nominal rate of return over the previous year while the real rate of return was 6.65%,
then the inflation rate was:
29.
The actual real rate of return on an investment will be positive as long as the:
30.
If inflation is 6%, what real rate of return is earned by an investor in a bond that was purchased for $1,000, has an annual
coupon of 8%, and was sold at the end of the year for $960?
31.
The Dow Jones Industrial Average is:
32.
“Dow up 14. Story at 6:00.” This means that:
33.
Although several stock indexes are available to inform investors of market changes, the Dow Jones Industrial Average:
34.
Risks that are peculiar to a single firm:
35.
Stock A has 10 million shares outstanding and stock B has 5 million shares outstanding. Both stocks sell for $10 a share.
What is their relative weighting if both stocks are represented in the S&P 500?
36.
Which one of these is the safest investment?
37.
Although Standard and Poor’s Composite Index contains a limited number of U.S. publicly traded stocks, the Index
represents:
38.
The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that the bills:
39.
Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were
offering a 6% return over their 15-year life. If the investor sells now, he or she is likely to realize a total return that is:
40.
A maturity premium is offered on long-term Treasury bonds due to:
41.
The idea that investors on average have earned a higher return from common stocks than from Treasury bills supports the
view that:
42.
Which one of the following guarantees is offered to common stock investors?
43.
The wider the dispersion of returns on a stock, the:
44.
The variance of an investment’s returns is a measure of the:
45.
Which one of the following security classes has the highest standard deviation of returns?
46.
In a year in which common stocks offered an average return of 18% and Treasury bills offered 7%. The risk premium for
common stocks was:
47.
Over a 20-year period an investment of $1,000 in common stocks returned an average of 11% in nominal terms and 4% in
real terms. At the end of the 20 years, the portfolio value was:
48.
A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into
a recessionary period. Economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance
of a recession. What is the expected return on the stock?
49.
When the annual rate of return on U.S. Treasury bills is historically high, investors expect the return on the stock market:
50.
Historical returns (1900-2015) suggest that in a year when Treasury bills offered 7.5 the approximate return on portfolio of
common stocks should be in the region of:
51.
The appropriate opportunity cost of capital is the return that investors give up on alternative investments that:
52.
An estimation of the opportunity cost of capital for projects that have an “average” level of risk is the expected rate of return
on:
53.
Over the past 3 years an investment returned 18%, −12%, and 15%. What is the variance of returns?
54.
Over the past 4 years an investment returned 18%, −9%, −12%, and 15%. What is the standard deviation of returns?
55.
The variance of a stock’s returns can be calculated as the: