ESSENTIALS CORPORATE FINANCE Stephen Ross 8th Edition Test Bank

ESSENTIALS CORPORATE FINANCE Stephen Ross 8th Edition Test Bank

Description

Chapter 10
Some Lessons from Capital Market History

Multiple Choice Questions

1. Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

A. Inflation premium

B. Required return

C. Real return

D. Average return

E. Risk premium

2. The variance is the average squared difference between which of the following?

A. Actual return and average return

B. Actual return and (average return/N 1)

C. Actual return and the real return

D. Average return and the standard deviation

E. Actual return and the risk-free rate

3. Which one of the following is the positive square root of the variance?

A. Standard deviation

B. Mean

C. Risk-free rate

D. Average return

E. Real return

4. Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

A. Arithmetic average return

B. Variance

C. Standard deviation

D. Probability curve

E. Normal distribution

5. Which one of the following is defined as the average compound return earned per year over a multiyear period?

A. Geometric average return

B. Variance of returns

C. Standard deviation of returns

D. Arithmetic average return

E. Normal distribution of returns

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

A. Total return divided by N 1, where N equals the number of individual returns

B. Average compound return earned per year over a multiyear period

C. Total compound return divided by the number of individual returns

D. Return earned in an average year over a multiyear period

E. Positive square root of the average compound return

7. An efficient capital market is best defined as a market in which security prices reflect which one of the following?

A. Current inflation

B. A risk premium

C. Available information

D. The historical arithmetic rate of return

E. The historical geometric rate of return

8. Which one of the following is the hypothesis that securities markets are efficient?

A. Geometric market hypothesis

B. Standard deviation hypothesis

C. Efficient markets hypothesis

D. Capital market hypothesis

E. Financial markets hypothesis

9. Which one of the following combinations will always result in an increased dividend yield?

A. Increase in the stock price combined with a lower dividend amount

B. Increase in the stock price combined with a higher dividend amount

C. Decrease in the stock price combined with a lower dividend amount

D. Decrease in the stock price combined with a higher dividend amount

E. Increase in the stock price combined with a constant dividend amount

10. Which one of the following could cause the total return on an investment to be a negative rate?

A. Constant annual dividend amount

B. Increase in the annual dividend amount

C. Stock price that remains constant over the investment period

D. Stock price that declines over the investment period

E. Stock price that increases over the investment period

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

A. The dollar return is dependent on the size of the investment while the percentage return is not.

B. The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not.

C. The dollar return considers the time value of money while the percentage return does not.

D. Dollar returns are based on capital gains while percentage returns are based on the total rate of return.

E. Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive.

12. Percentage returns:

I. are easy to understand.
II. relay information about a security more easily than dollar returns do.
III. are not affected by the amount of the investment.
IV. can be easily separated into dividend yield and capital gain yield.

A. II and III only

B. I and III only

C. I, II, and III only

D. I, II, and IV only

E. I, II, III, and IV

13. 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:

A. stock price increased by 8.2 percent over the last year.

B. stock increased in value over the past year.

C. stock paid a dividend.

D. dividend yield is greater than zero.

E. sum of the dividend yield and the capital gains yield is 8.2 percent.

14. 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 the stocks listed on the NYSE.

E. stocks of the 500 companies included in the S&P 500 index.

15. Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns?

A. Large-company stocks

B. U.S. Treasury bills

C. Small-company stocks

D. Long-term corporate bonds

E. Long-term government bonds

16. Over the period of 1926-2011:

A. long-term government bonds underperformed long-term corporate bonds.

B. small-company stocks underperformed large-company stocks.

C. inflation exceeded the rate of return on U.S. Treasury bills.

D. U.S. Treasury bills outperformed long-term government bonds.

E. large-company stocks outperformed all other investment categories.

17. Over the period of 1926-2011:

A. the risk premium on large-company stocks was greater than the risk premium on small- company stocks.

B. U.S. Treasury bills had a risk premium that was just slightly over 2 percent.

C. the risk premium on long-term government bonds was zero percent.

D. the risk premium on stocks exceeded the risk premium on bonds.

E. U. S. Treasury bills had a negative risk premium.

18. The rate of return on which one of the following is used as the risk-free rate?

A. Long-term government bonds

B. Long-term corporate bonds

C. Inflation, as measured by the Consumer Price Index

D. U.S. Treasury bill

E. Large-company stocks

19. Which one of the following had the lowest standard deviation of returns for the period of 1926-2011?

A. U.S. Treasury bill

B. Inflation

C. Long-term corporate bonds

D. Large-company stocks

E. Long-term government bonds

20. Which one of the following categories has the widest frequency distribution of returns for the period 1926-2011?

A. Small-company stocks

B. U.S. Treasury bills

C. Long-term government bonds

D. Inflation

E. Large-company stock

21. The period 1926-2011 illustrates that U.S. Treasury bills:

A. outperform inflation by approximately 1 percent every year.

B. have a zero standard deviation.

C. can either outperform or underperform inflation on an annual basis.

D. produce a rate of return roughly equivalent to the rate of return on long-term government bonds.

E. routinely have negative annual returns.

22. The historical record for the period 1926-2011 shows that the annual nominal rate of return on:

A. risk-free securities has averaged around 5 percent.

B. the Consumer Price Index has been positive every year.

C. U.S. Treasury bills have had a positive rate of return for every year in the period.

D. U.S. Treasury bills is constant.

E. large company stocks has averaged around 9 percent.

23. What was the average annual risk premium on small-company stocks for the period 1926-2011?

A. 5.3 percent

B. 6.2 percent

C. 8.5 percent

D. 12.9 percent

E. 15.3 percent

24. Based on the period 1926-2011, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

A. Between 0 and 1 percent

B. Between 1 and 2 percent

C. Between 2 and 3 percent

D. Between 3 and 4 percent

E. Between 4 and 5 percent

25. Which one of the following statements is true regarding the period 1926-2011?

A. The returns on small-company stocks were less volatile than the returns on large-company stocks.

B. The risk-free rate of return remained constant over the time period.

C. U.S. Treasury bills had a positive average real rate of return.

D. Bonds had an average rate of return that exceeded the average return on stocks.

E. The inflation rate was just as volatile as the return on long-term bonds.

26. For the period 1926-2011, which one of the following had the smallest risk premium?

A. Large-company stocks

B. Small-company stocks

C. Long-term corporate bonds

D. U.S. Treasury bills

E. Long-term government bonds

27. Which one of the following statements is correct?

A. The risk-free rate of return has a risk premium of 1.0.

B. The reward for bearing risk is called the standard deviation.

C. Risks and expected return are inversely related.

D. The higher the expected rate of return, the wider the distribution of returns.

E. Risk premiums are inversely related to the standard deviation of returns.

28. Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2011?

A. U.S. Treasury bills

B. Large-company stocks

C. Long-term government debt

D. Small-company stocks

E. Long-term corporate debt

29. The average risk premium on long-term government bonds for the period 1926-2011 was equal to:

A. zero.

B. 1 percent.

C. the rate of return on the bonds plus the corporate bond rate.

D. the rate of return on the bonds minus the T-bill rate.

E. the rate of return on the bonds minus the inflation rate.

30. The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

A. lower; lower

B. lower; higher

C. higher; lower

D. higher; higher

E. You cannot determine anything about the expected rate of return from the standard deviation.

31. The standard deviation measures the _____ of a securitys returns over time.

A. average value

B. frequency

C. volatility

D. mean

E. arithmetic average

32. Which one of the following has the narrowest distribution of returns for the period 1926-2011?

A. Long-term corporate bonds

B. Long-term government bonds

C. Intermediate-terms government bonds

D. Large-company stocks

E. Small-company stocks

33. What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?

A. 0.05 percent

B. 0.5 percent

C. 1.0 percent

D. 2.5 percent

E. 5.0 percent

34. When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?

A. When the set of returns includes only risk-free rates.

B. When the set of returns has a wide frequency distribution.

C. When the set of returns has a very narrow frequency distribution.

D. When all of the rates of return in the set of returns are equal to each other.

E. Never

35. Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

A. The risk premium on any security in that market will be zero.

B. The price of any one security in that market will remain constant at its current level.

C. Each security in the market will have an annual rate of return equal to the risk-free rate.

D. The price of each security in that market will frequently fluctuate.

E. The prices of each security will fall to zero because the net present value of the investments will be zero.

36. New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

A. The price of New Labs stock remains unchanged.

B. The price of New Labs stock increases rapidly and then settles back to its pre-announcement level.

C. The price of New Labs stock increases rapidly to a higher price and then remains at that price.

D. All stocks quickly increase in value and then all but New Labs stock fall back to their original values.

E. The value of all stocks suddenly increase and then level off at their higher values.

37. If the financial markets are efficient then:

A. stock prices should remain constant.

B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.

C. an increase in the value of one security should be offset by a decrease in the value of another security.

D. stock prices will change only when an event actually occurs, not at the time the event is anticipated.

E. stock prices should respond only to unexpected news and events.

38. According to the efficient markets hypothesis, professional investors will earn:

A. excess profits over the long-term.

B. excess profits, but only on short-term investments.

C. a dollar return equal to the value paid for an investment.

D. a return that cannot be accurately predicted because investments are subject to the random movements of the markets.

E. a return that beats the market.

39. Semistrong form market efficiency states that the value of a security is based on:

A. all public and private information.

B. historical information only.

C. all publicly available information.

D. all publicly available information plus any data that can be gathered from insider trading.

E. random information with no clear distinction as to the source of that information.

40. Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are:

A. weak form efficient.

B. strong form efficient.

C. semistrong form efficient.

D. efficient at any level.

E. aware that the trader is an insider.

41. If the financial markets are semistrong form efficient, then:

A. only the most talented analysts can determine the true value of a security.

B. only individuals with private information have a marketplace advantage.

C. technical analysis provides the best tool to use to gain a marketplace advantage.

D. no one individual has an advantage in the marketplace.

E. every security offers the same rate of return.

42. One year ago, you purchased 500 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment?

A. $6,222

B. $7,432

C. $8,150

D. $7,775

E. $8,260

43. One year ago, you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par. Today, you sold this bond for 99.8 percent of par. What is your total dollar return on this investment?

A. $36

B. $60

C. $64

D. $74

E. $82

44. Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 2.5 percent when the stock was selling for $26 a share. What is the current price of the stock if the current dividend yield is 3.1 percent?

A. $18.92

B. $20.97

C. $25.20

D. $26.87

E. $27.40

45. The Bermuda Triangle Store pays a constant dividend. Last year, the dividend yield was 5.4 percent when the stock was selling for $15 a share. What must the stock price be today if the market currently requires a 3.8 percent dividend yield on this stock?

A. $21.32

B. $12.30

C. $11.59

D. $19.22

E. $22.48

46. The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share?

A. $0.021

B. $0.210

C. $0.840

D. $0.871

E. $0.875

47. One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains yield on this investment?

A. 2.86 percent

B. 4.70 percent

C. 12.88 percent

D. 15.62 percent

E. 18.53 percent

48. Hercules Movers pays a constant annual dividend of $1.75 per share on its stock. Last year at this time, the market rate of return on this stock was 14.8 percent. Today, the market rate has fallen to 11.2 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

A. 18.78 percent

B. 22.03 percent

C. 28.16 percent

D. 30.00 percent

E. 32.14 percent

49. One year ago, Debra purchased 4,200 shares of KNF stock for $177,072. Today, she sold those shares for $48.10 a share. What is the capital gains yield on this investment if the dividend yield is 4.1 percent?

A. 10.79 percent

B. 11.23 percent

C. 13.07 percent

D. 15.04 percent

E. 14.53 percent

50. One year ago, Peyton purchased 3,600 shares of Broncos stock for $101,124. Today, he sold those shares for $26.60 a share. What is the total return on this investment if the dividend yield is 1.9 percent?

A. -3.98 percent

B. -3.40 percent

C. -2.29 percent

D. 1.10 percent

E. 3.40 percent

51. One year ago, LaTresa purchased 600 shares of Outland Co. stock for $3,600. The stock does not pay any regular dividends but it did pay a special dividend of $0.30 a share last week. This morning, she sold her shares for $7.25 a share. What was the total return on this investment?

A. 18.00 percent

B. 20.83 percent

C. 22.50 percent

D. 25.83 percent

E. 28.24 percent

52. Last year, Isaac earned 10.6 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?

A. 6.63 percent

B. 7.27 percent

C. 8.56 percent

D. 9.24 percent

E. 10.39 percent

53. You earned 26.3 percent on your investments for a time period when the risk-free rate was 3.8 percent and the inflation rate was 4.0 percent. What was your real rate of return for the period?

A. 19.12 percent

B. 20.06 percent

C. 21.44 percent

D. 21.67 percent

E. 21.08 percent

54. Sarah earned a 2.9 percent real rate of return on her investments for the past year. During that time, the risk-free rate was 4.1 percent and the inflation rate was 3.6 percent. What was her nominal rate of return?

A. 5.30 percent

B. 6.06 percent

C. 6.60 percent

D. 6.67 percent

E. 6.91 percent

55. Rocky Top 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 9 percent and you just sold all of your shares. What is your total nominal return on this investment? Round your answer to the nearest whole percentage.

A. -77 percent

B. -75 percent

C. -76 percent

D. 70 percent

E. 76 percent

56. Last year, Paul invested $38,000 in Oil Town stock, $11,000 in long-term government bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he earned returns of 12.1 percent, 7.2 percent, and 4.1 percent, respectively. What was the nominal risk premium on Oil Towns stock for the year?

A. 2.1 percent

B. 4.9 percent

C. 6.0 percent

D. 7.8 percent

E. 8.0 percent

57. You expect the inflation rate to be 3.8 percent and the U.S. Treasury bill yield to be 3.9 percent for the next year. The risk premium on small-company stocks is 12.6 percent. What nominal rate of return do you expect to earn on small-company stocks next year?

A. 15.5 percent

B. 16.5 percent

C. 16.8 percent

D. 9.2 percent

E. 8.8 percent

58. Assume large-company stocks returned 12.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6 percent. What was the average nominal risk-free rate of return for those 75 years?

A. 4.90 percent

B. 9.20 percent

C. 4.26 percent

D. 8.33 percent

E. 8.60 percent

59. Over the past five years, a stock returned 8.3 percent, -32.5 percent, -2.2 percent, 46.9 percent, and 11.8 percent, respectively. What is the variance of these returns?

A. 0.071188

B. 0.076290

C. 0.081504

D. 0.082547

E. 0.091306

60. Windsor stock has produced returns of 22.6 percent, 18.7 percent, 11.3 percent, -19.8 percent, and 2.4 percent over the past five years, respectively. What is the variance of these returns?

A. 0.028453

B. 0.031947

C. 0.035682

D. 0.039515

E. 0.040016

61. Five years ago, you purchased 600 shares of stock. The annual returns have been 7.2 percent, -19.4 percent, 3.8 percent, 14.2 percent, and 27.9 percent, respectively. What is the variance of these returns?

A. 0.029889

B. 0.030021

C. 0.030068

D. 0.030133

E. 0.030284

62. Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns?

A. 11.27 percent

B. 13.05 percent

C. 13.59 percent

D. 15.08 percent

E. 14.40 percent

63. A stock has produced returns of 11 percent, 18 percent, -6 percent, -13 percent, and 21 percent for the past five years, respectively. What is the standard deviation of these returns?

A. 7.75 percent

B. 8.87 percent

C. 9.23 percent

D. 14.99 percent

E. 16.64 percent

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

A. 5.52 percent

B. 5.86 percent

C. 6.05 percent

D. 6.47 percent

E. 6.99 percent

65. Kelly decided to accept the risk and purchased a high growth stock. Her returns for the past five years are 48 percent, 39 percent, -56 percent, 61 percent, and -24 percent, respectively. What is the standard deviation of these returns?

A. 43.20 percent

B. 45.46 percent

C. 47.88 percent

D. 50.83 percent

E. 58.39 percent

66. Over the past four years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 2.8 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills.

A. 6.47; 0.92

B. 6.47; 1.08

C. 7.98; 0.92

D. 7.98; 1.08

E. 7.98; 1.22

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

A. -6.58 percent to 31.33 percent

B. -6.58 percent to 27.02 percent

C. -6.58 percent to 24.39 percent

D. -0.02 percent to 24.39 percent

E. -0.02 percent to 27.02 percent

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

A. -82.39 percent to 84.39 percent

B. -82.39 percent to 86.41 percent

C. -82.39 percent to 88.56 percent

D. -78.46 percent to 86.41 percent

E. -78.46 percent to 84.39 percent

69. A security produced returns of 13 percent, 18 percent, 9 percent, 23 percent, and -17 percent over the past five years, respectively. Based on these five years, what is the probability that this stock will earn more than 24.76 percent in any one given year?

A. 0.5 percent

B. 1.0 percent

C. 2.5 percent

D. 5.0 percent

E. 16.0 percent

70. A security produced returns of 12 percent, -11 percent, -2 percent, 15 percent, and 9 percent over the past five years, respectively. Based on these five years, what is the probability that an investor in this stock will lose more than 17.06 percent in any one given year?

A. 0.50 percent

B. 1.00 percent

C. 1.25 percent

D. 2.50 percent

E. 5.00 percent

71. 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?

A. -1.30 percent to 13.9 percent

B. -1.30 percent to 10.1 percent

C. 2.5 percent to 7.8 percent

D. 2.5 percent to 10.1 percent

E. 2.5 percent t0 13.9 percent

72. A stock has an average return of 19.2 percent and a standard deviation of 10.7 percent. In any one given year, you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent if you invest in this security.

A. -2.2; 38.2

B. -2.2; 40.6

C. -13.9; 28.9

D. -13.9; 39.6

E. -13.9; 50.3

73. Home Grown Tomatoes stock returned 28.7 percent, 2.6 percent, 13.1 percent, 12.2, and 11.8 percent over the past five years, respectively. What is the arithmetic average return for this period?

A. 13.68 percent

B. 14.62 percent

C. 15.10 percent

D. 15.93 percent

E. 17.10 percent

74. You purchased 1,500 shares of KFC stock five years ago and have earned annual returns of 7.1 percent, 11.2 percent, 5.25 percent, -4.7 percent, and 11.8 percent, respectively. What is your arithmetic average return?

A. 4.47 percent

B. 6.13 percent

C. 6.23 percent

D. 6.47 percent

E. 8.01 percent

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

A. 6.82 percent

B. 8.54 percent

C. 9.09 percent

D. 10.83 percent

E. 11.75 percent

76. A stock produced returns of 19 percent, 27 percent, and -38 percent over three of the past four years, respectively. The arithmetic average for the past four years is 7 percent. What is the standard deviation of the stocks returns for the four-year period?

A. 11.63 percent

B. 15.94 percent

C. 19.70 percent

D. 26.25 percent

E. 30.21 percent

77. Your portfolio has provided you with returns of 8.6 percent, 14.2 percent, -3.7 percent, and 12.0 percent over the past four years, respectively. What is the geometric average return for this period?

A. 7.25 percent

B. 7.54 percent

C. 7.57 percent

D. 7.63 percent

E. 9.55 percent

78. The common stock of Hillshire Farms has yielded 16.3 percent, 7.2 percent, 11.8 percent, -3.6 percent, and 9.7 percent over the past five years, respectively. What is the geometric average return?

A. 7.91 percent

B. 8.03 percent

C. 8.07 percent

D. 8.27 percent

E. 9.64 percent

79. A stock has produced returns of 16.6 percent, 3.4 percent, 11.7 percent, and -9.2 percent over the past four years, respectively. What is the geometric average return?

A. 5.16 percent

B. 5.47 percent

C. 6.23 percent

D. 6.61 percent

E. 10.12 percent

80. Over the last four years, the common stock of Plymouth Shippers has had an arithmetic average return of 9.3 percent. Three of those four years produced returns of 14.1 percent, 15.6 percent, and 3.4 percent, respectively. What is the geometric average return for this four-year period?

A. 7.72 percent

B. 8.41 percent

C. 8.93 percent

D. 9.16 percent

E. 9.368 percent

81. Over the last four years, a stock has had an arithmetic average return of 8.8 percent. Three of those four years produced returns of 16.3 percent, 10.2 percent, and -14.1 percent, respectively. What is the geometric average return for this four-year period?

A. 7.83 percent

B. 8.39 percent

C. 8.67 percent

D. 9.40 percent

E. 9.97 percent

82. Suppose a stock had an initial price of $74 per share, paid a dividend of $0.80 per share during the year, and had an ending share price of $77. What was the capital gains yield?

A. 2.70 percent

B. 3.29 percent

C. 3.78 percent

D. 4.05 percent

E. 4.94 percent

83. Suppose you bought a 6 percent coupon bond one year ago for $929. The bond sells today for $933. The face value is $1,000. If the inflation rate last year was 4.3 percent, what was your total real rate of return on this investment?

A. 1.02 percent

B. 2.48 percent

C. 4.31 percent

D. 6.89 percent

E. 7.08 percent

84. A stock has returns for five years of 23 percent, -17 percent, 8 percent, 22 percent, and 3 percent, respectively. The stock has an average return of ______ percent and a standard deviation of _____ percent.

A. 7.80; 13.54

B. 7.80; 14.63

C. 7.80; 16.36

D. 14.60; 14.63

E. 14.60; 16.36

85. Youve observed the following returns on Blast It Corporations stock over the past five years: 11 percent, -28 percent, 16 percent, 18 percent, and 3 percent, respectively. What was the variance of the returns over this period?

A. 0.03598

B. 0.03637

C. 0.03692

D. 0.03714

E. 0.03781

86. You purchased a zero coupon bond one year ago for $291.22. The market interest rate is now 8.75 percent. If the bond had 16 years to maturity when you originally purchased it, what was your total return for the past year if the face value of the bond is $1,000?

A. -4.97 percent

B. -2.18 percent

C. 1.34 percent

D. 2.65 percent

E. 2.90 percent

87. You bought a share of 8.5 percent preferred stock for $87.40 last year. The market price for your stock is now $88.10. What is your total return for last year?

A. 7.51 percent

B. 7.73 percent

C. 7.86 percent

D. 8.10 percent

E. 10.53 percent

88. Assume that long-term corporate bonds had an average return of 5.3 percent and a standard deviation of 9.3 percent for a 30-year period. What range of returns would you expect to see on these bonds 68 percent of the time?

A. -4.0 percent to 14.6 percent

B. -4.0 percent to 22.9 percent

C. -11.3 percent to 14.6 percent

D. -11.3 percent to 17.4 percent

E. -11.3 percent to 22.9 percent

89. Assume that large-company stocks had an average return of 11.4 percent and a standard deviation of 19.7 percent for a 40-year period. What range of returns would you expect to see on these stocks 95 percent of the time?

A. -50.3 percent to 53.2 percent

B. -50.3 percent to 73.9 percent

C. -50.3 percent to 64.1 percent

D. 28.0 percent to 50.8 percent

E. -28.0 percent to 50.8 percent

90. You find a certain stock that had returns of 14 percent, -27 percent, 19 percent, and 21 percent for four of the last five years, respectively. The average return of the stock over this period was 9.5 percent. What is the standard deviation of the stocks returns?

A. 11.67 percent

B. 12.90 percent

C. 14.14 percent

D. 18.47 percent

E. 20.59 percent

91. A stock has had returns of 11 percent, -8 percent, 6 percent, 21 percent, 24 percent, and 16 percent over the last six years, respectively. What is the geometric return for this stock?

A. 10.82 percent

B. 11.13 percent

C. 11.31 percent

D. 11.42 percent

E. 11.47 percent

Essay Questions

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

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

94. For the period 1926-2011, 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.

95. Over the period of 1926-2011, U. S. Treasury bills had an average return of 3.8 percent while inflation averaged 3.1 percent. Based on this historical record, is it safe to assume that an investor in U.S. Treasury bills will enjoy a positive real rate of return each year? Why or why not?

Chapter 10 Some Lessons from Capital Market History Answer Key

Multiple Choice Questions

1. Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

A. Inflation premium

B. Required return

C. Real return

D. Average return

E. Risk premium
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.3
Topic: Risk premium

2. The variance is the average squared difference between which of the following?

A. Actual return and average return

B. Actual return and (average return/N 1)

C. Actual return and the real return

D. Average return and the standard deviation

E. Actual return and the risk-free rate
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Variance

3. Which one of the following is the positive square root of the variance?

A. Standard deviation

B. Mean

C. Risk-free rate

D. Average return

E. Real return
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Standard deviation

4. Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

A. Arithmetic average return

B. Variance

C. Standard deviation

D. Probability curve

E. Normal distribution
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Normal distribution

5. Which one of the following is defined as the average compound return earned per year over a multiyear period?

A. Geometric average return

B. Variance of returns

C. Standard deviation of returns

D. Arithmetic average return

E. Normal distribution of returns
Refer to Section 10.5.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.5
Topic: Geometric average return

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

A. Total return divided by N 1, where N equals the number of individual returns

B. Average compound return earned per year over a multiyear period

C. Total compound return divided by the number of individual returns

D. Return earned in an average year over a multiyear period

E. Positive square root of the average compound return
Refer to Section 10.5.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.5
Topic: Arithmetic average return

7. An efficient capital market is best defined as a market in which security prices reflect which one of the following?

A. Current inflation

B. A risk premium

C. Available information

D. The historical arithmetic rate of return

E. The historical geometric rate of return
Refer to Section 10.6.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Efficient capital market

8. Which one of the following is the hypothesis that securities markets are efficient?

A. Geometric market hypothesis

B. Standard deviation hypothesis

C. Efficient markets hypothesis

D. Capital market hypothesis

E. Financial markets hypothesis
Refer to Section 10.6.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Efficient Markets Hypothesis

9. Which one of the following combinations will always result in an increased dividend yield?

A. Increase in the stock price combined with a lower dividend amount

B. Increase in the stock price combined with a higher dividend amount

C. Decrease in the stock price combined with a lower dividend amount

D. Decrease in the stock price combined with a higher dividend amount

E. Increase in the stock price combined with a constant dividend amount
Refer to Section 10.1.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Dividend yield

10. Which one of the following could cause the total return on an investment to be a negative rate?

A. Constant annual dividend amount

B. Increase in the annual dividend amount

C. Stock price that remains constant over the investment period

D. Stock price that declines over the investment period

E. Stock price that increases over the investment period
Refer to Section 10.1.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Total return

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

A. The dollar return is dependent on the size of the investment while the percentage return is not.

B. The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not.

C. The dollar return considers the time value of money while the percentage return does not.

D. Dollar returns are based on capital gains while percentage returns are based on the total rate of return.

E. Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive.
Refer to Section 10.1.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Dollar and percentage returns

12. Percentage returns:

I. are easy to understand.
II. relay information about a security more easily than dollar returns do.
III. are not affected by the amount of the investment.
IV. can be easily separated into dividend yield and capital gain yield.

A. II and III only

B. I and III only

C. I, II, and III only

D. I, II, and IV only

E. I, II, III, and IV
Refer to Section 10.1.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Percentage returns

13. 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:

A. stock price increased by 8.2 percent over the last year.

B. stock increased in value over the past year.

C. stock paid a dividend.

D. dividend yield is greater than zero.

E. sum of the dividend yield and the capital gains yield is 8.2 percent.
Refer to Section 10.1.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Total return

14. 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 the stocks listed on the NYSE.

E. stocks of the 500 companies included in the S&P 500 index.
Refer to Section 10.2.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.2
Topic: Historical returns

15. Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns?

A. Large-company stocks

B. U.S. Treasury bills

C. Small-company stocks

D. Long-term corporate bonds

E. Long-term government bonds
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Historical volatility of returns

16. Over the period of 1926-2011:

A. long-term government bonds underperformed long-term corporate bonds.

B. small-company stocks underperformed large-company stocks.

C. inflation exceeded the rate of return on U.S. Treasury bills.

D. U.S. Treasury bills outperformed long-term government bonds.

E. large-company stocks outperformed all other investment categories.
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.3
Topic: Historical returns

17. Over the period of 1926-2011:

A. the risk premium on large-company stocks was greater than the risk premium on small- company stocks.

B. U.S. Treasury bills had a risk premium that was just slightly over 2 percent.

C. the risk premium on long-term government bonds was zero percent.

D. the risk premium on stocks exceeded the risk premium on bonds.

E. U. S. Treasury bills had a negative risk premium.
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.3
Topic: Risk premium

18. The rate of return on which one of the following is used as the risk-free rate?

A. Long-term government bonds

B. Long-term corporate bonds

C. Inflation, as measured by the Consumer Price Index

D. U.S. Treasury bill

E. Large-company stocks
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.3
Topic: Risk-free rate

19. Which one of the following had the lowest standard deviation of returns for the period of 1926-2011?

A. U.S. Treasury bill

B. Inflation

C. Long-term corporate bonds

D. Large-company stocks

E. Long-term government bonds
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Historical risk

20. Which one of the following categories has the widest frequency distribution of returns for the period 1926-2011?

A. Small-company stocks

B. U.S. Treasury bills

C. Long-term government bonds

D. Inflation

E. Large-company stock
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Historical risk

21. The period 1926-2011 illustrates that U.S. Treasury bills:

A. outperform inflation by approximately 1 percent every year.

B. have a zero standard deviation.

C. can either outperform or underperform inflation on an annual basis.

D. produce a rate of return roughly equivalent to the rate of return on long-term government bonds.

E. routinely have negative annual returns.
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.4
Topic: Historical returns

22. The historical record for the period 1926-2011 shows that the annual nominal rate of return on:

A. risk-free securities has averaged around 5 percent.

B. the Consumer Price Index has been positive every year.

C. U.S. Treasury bills have had a positive rate of return for every year in the period.

D. U.S. Treasury bills is constant.

E. large company stocks has averaged around 9 percent.
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.3
Topic: Historical returns

23. What was the average annual risk premium on small-company stocks for the period 1926-2011?

A. 5.3 percent

B. 6.2 percent

C. 8.5 percent

D. 12.9 percent

E. 15.3 percent
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.3
Topic: Historical risk premium

24. Based on the period 1926-2011, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

A. Between 0 and 1 percent

B. Between 1 and 2 percent

C. Between 2 and 3 percent

D. Between 3 and 4 percent

E. Between 4 and 5 percent
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.3
Topic: Historical returns

25. Which one of the following statements is true regarding the period 1926-2011?

A. The returns on small-company stocks were less volatile than the returns on large-company stocks.

B. The risk-free rate of return remained constant over the time period.

C. U.S. Treasury bills had a positive average real rate of return.

D. Bonds had an average rate of return that exceeded the average return on stocks.

E. The inflation rate was just as volatile as the return on long-term bonds.
Refer to Section 10.4.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Historical risk and returns

26. For the period 1926-2011, which one of the following had the smallest risk premium?

A. Large-company stocks

B. Small-company stocks

C. Long-term corporate bonds

D. U.S. Treasury bills

E. Long-term government bonds
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.3
Topic: Risk premium

27. Which one of the following statements is correct?

A. The risk-free rate of return has a risk premium of 1.0.

B. The reward for bearing risk is called the standard deviation.

C. Risks and expected return are inversely related.

D. The higher the expected rate of return, the wider the distribution of returns.

E. Risk premiums are inversely related to the standard deviation of returns.
Refer to Sections 10.3 and 10.4.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.3
Section: 10.4
Topic: Risk and return

28. Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2011?

A. U.S. Treasury bills

B. Large-company stocks

C. Long-term government debt

D. Small-company stocks

E. Long-term corporate debt
Refer to Section 10.3.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.3
Topic: Risk premium

29. The average risk premium on long-term government bonds for the period 1926-2011 was equal to:

A. zero.

B. 1 percent.

C. the rate of return on the bonds plus the corporate bond rate.

D. the rate of return on the bonds minus the T-bill rate.

E. the rate of return on the bonds minus the inflation rate.
Refer to Section 10.3.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the historical returns on various important types of investments.
Section: 10.3
Topic: Risk premium

30. The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

A. lower; lower

B. lower; higher

C. higher; lower

D. higher; higher

E. You cannot determine anything about the expected rate of return from the standard deviation.
Refer to Section 10.4.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Standard deviation of returns

31. The standard deviation measures the _____ of a securitys returns over time.

A. average value

B. frequency

C. volatility

D. mean

E. arithmetic average
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Standard deviation

32. Which one of the following has the narrowest distribution of returns for the period 1926-2011?

A. Long-term corporate bonds

B. Long-term government bonds

C. Intermediate-terms government bonds

D. Large-company stocks

E. Small-company stocks
Refer to Section 10.4.

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Return distributions

33. What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?

A. 0.05 percent

B. 0.5 percent

C. 1.0 percent

D. 2.5 percent

E. 5.0 percent
Refer to Section 10.4.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-03 Explain the historical risks on various important types of investments.
Section: 10.4
Topic: Probability range

34. When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?

A. When the set of returns includes only risk-free rates.

B. When the set of returns has a wide frequency distribution.

C. When the set of returns has a very narrow frequency distribution.

D. When all of the rates of return in the set of returns are equal to each other.

E. Never
Refer to Section 10.5.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.5
Topic: Arithmetic and geometric averages

35. Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

A. The risk premium on any security in that market will be zero.

B. The price of any one security in that market will remain constant at its current level.

C. Each security in the market will have an annual rate of return equal to the risk-free rate.

D. The price of each security in that market will frequently fluctuate.

E. The prices of each security will fall to zero because the net present value of the investments will be zero.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Strong form efficient

36. New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

A. The price of New Labs stock remains unchanged.

B. The price of New Labs stock increases rapidly and then settles back to its pre-announcement level.

C. The price of New Labs stock increases rapidly to a higher price and then remains at that price.

D. All stocks quickly increase in value and then all but New Labs stock fall back to their original values.

E. The value of all stocks suddenly increase and then level off at their higher values.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Market efficiency

37. If the financial markets are efficient then:

A. stock prices should remain constant.

B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.

C. an increase in the value of one security should be offset by a decrease in the value of another security.

D. stock prices will change only when an event actually occurs, not at the time the event is anticipated.

E. stock prices should respond only to unexpected news and events.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Market efficiency

38. According to the efficient markets hypothesis, professional investors will earn:

A. excess profits over the long-term.

B. excess profits, but only on short-term investments.

C. a dollar return equal to the value paid for an investment.

D. a return that cannot be accurately predicted because investments are subject to the random movements of the markets.

E. a return that beats the market.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Efficient Markets Hypothesis

39. Semistrong form market efficiency states that the value of a security is based on:

A. all public and private information.

B. historical information only.

C. all publicly available information.

D. all publicly available information plus any data that can be gathered from insider trading.

E. random information with no clear distinction as to the source of that information.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Market efficiency

40. Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are:

A. weak form efficient.

B. strong form efficient.

C. semistrong form efficient.

D. efficient at any level.

E. aware that the trader is an insider.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Market efficiency

41. If the financial markets are semistrong form efficient, then:

A. only the most talented analysts can determine the true value of a security.

B. only individuals with private information have a marketplace advantage.

C. technical analysis provides the best tool to use to gain a marketplace advantage.

D. no one individual has an advantage in the marketplace.

E. every security offers the same rate of return.
Refer to Section 10.6.

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-04 Assess the implications of market efficiency.
Section: 10.6
Topic: Market efficiency

42. One year ago, you purchased 500 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment?

A. $6,222

B. $7,432

C. $8,150

D. $7,775

E. $8,260
Total dollar return = 500 ($28.30 $12 + $0.22) = $8,260

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Total dollar return

43. One year ago, you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par. Today, you sold this bond for 99.8 percent of par. What is your total dollar return on this investment?

A. $36

B. $60

C. $64

D. $74

E. $82
Total dollar return = (0.998 $1,000) (1.012 $1,000) + (0.05 $1,000) = $36

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Total dollar return

44. Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 2.5 percent when the stock was selling for $26 a share. What is the current price of the stock if the current dividend yield is 3.1 percent?

A. $18.92

B. $20.97

C. $25.20

D. $26.87

E. $27.40
D = 0.025 $26 = $0.65
P0 = $0.65/0.031 = $20.97

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Dividend yield

45. The Bermuda Triangle Store pays a constant dividend. Last year, the dividend yield was 5.4 percent when the stock was selling for $15 a share. What must the stock price be today if the market currently requires a 3.8 percent dividend yield on this stock?

A. $21.32

B. $12.30

C. $11.59

D. $19.22

E. $22.48
D = 0.054 $15 = $0.81
P0 = $0.81/0.038 = $21.32

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Dividend yield

46. The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share?

A. $0.021

B. $0.210

C. $0.840

D. $0.871

E. $0.875
D = 0.021 $40 = $0.84

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Dividend yield

47. One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains yield on this investment?

A. 2.86 percent

B. 4.70 percent

C. 12.88 percent

D. 15.62 percent

E. 18.53 percent
Capital gains yield = ($41.18 $36.48)/$36.48 = 12.88 percent

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic: Capital gains yield

48. Hercules Movers pays a constant annual dividend of $1.75 per share on its stock. Last year at this time, the market rate of return on this stock was 14.8 percent. Today, the market rate has fallen to 11.2 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

A. 18.78 percent

B. 22.03 percent

C. 28.16 percent

D. 30.00 percent

E. 32.14 percent
P-1 = $1.75/0.148 = $11.8243
P0 = $1.75/0.112 = $15.6350
Capital gains yield = ($15.6250 $11.8243)/$11.8243 = 32.14 percent

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 10-01 Calculate the return on an investment.
Section: 10.1
Topic:

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