chapter 10

Question 1

The return earned in a typical year during a multiyear period is called the __________ average return.

Answer 1

arithmetic

Question 2

What percentage of the time should you expect to earn an annual rate of return that is within two standard deviations of the mean?

Answer 2

95%

Question 3

A review of annualized equity risk premiums by country for the period 1900–2010 shows that

Answer 3

Sharpe ratios vary significantly among countries.

Question 4

Which one of these statements is correct?

Answer 4

During the 1930s (the Great Depression), long-term government bonds produced a relatively stable rate of return relative to large-company stocks.

Question 5

How did long-term U.S. Treasury bonds perform in 2008?

Answer 5

Increased more than 15 percent

Question 6

Which one of these statements correctly reflects the period 1926–2018?

Answer 6

For large-company stocks, both the worst and best annual rate of return occurred during the period 1930–35.

Question 7

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the

Answer 7

risk premium.

Question 8

Which one of the following countries had the highest average stock market risk premium for the period 1900–2010?

Answer 8

Italy

Question 9

Based on historical performance from 1900–2010, the U.S. equity risk premium was approximately

Answer 9

7.2 percent.

Question 10

In 2008, the S&P 500 index

Answer 10

declined almost 17 percent in 1 month.

Question 11

Suppose a portfolio had an arithmetic average annual return of 9 percent during a 4-year period. Which one of these statements must be true regarding this portfolio for the period?

Answer 11

If the standard deviation of the portfolio is greater than zero, then the geometric average portfolio return is less than 9 percent.

Question 12

What lesson can be learned from the 2008 market decline?

Answer 12

Diversification lowers risk.

Question 13

You are comparing the returns of two portfolios for a 10-year period. Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II. Given this, what do you know with certainty?

Answer 13

Portfolio I has a lower standard deviation than Portfolio II.

Question 14

The geometric average is probably best applied to __________ performance.

Answer 14

past

Question 15

Which set of characteristics should you prefer in a stock if you desire the highest (least negative) rate of return assuming you will earn a negative total return for the period?

Answer 15

High-dividend, low standard deviation

Question 16

The capital gains yield plus the dividend yield on a security is called the

Answer 16

total return.

Question 17

The histogram of the returns on large-company stocks for the period 1926–2018 shows that the largest number of years had annual returns of

Answer 17

10 to 20 percent.

Question 18

As of 2017, the United States represented about __________ percent of the total world stock market capitalization.

Answer 18

58

Question 19

The risk premium is computed by __________ the average rate of return for an investment.

Answer 19

subtracting the average return on U.S. Treasury bills from

Question 20

How is the Sharpe ratio defined as it applies to security returns?

Answer 20

Risk premium / Standard deviation

Question 21

Past performance

Answer 21

does not guarantee future performance.

Question 22

Which one of these statements correctly reflects historical history for the period 1926–2018?

Answer 22

U.S. Treasury bills have had a positive rate of return every single year.

Question 23

Given a set of returns, the wider the distribution of those returns, the

Answer 23

higher the standard deviation.

Question 24

Over the long-term, which one of the following is a correct statement concerning risk premium?

Answer 24

Stocks tend to have a higher risk premium than bonds.

Question 25

For the period 1926–2018, large-company stocks had a standard deviation of

Answer 25

20 percent.

Question 26

For the period 1926–2018, the mean return on large-company stocks is

Answer 26

11.9 percent.

Question 27

During the period 2000–2018, which one of the following years had the lowest rate of return for the S&P 500 Index?

Answer 27

2008

Question 28

For our historical comparison purposes, how are large-company stocks defined?

Answer 28

Stocks of firms included in the S&P 500 composite index

Question 29

The standard deviation for a set of stock returns can be calculated as the

Answer 29

positive square root of the variance.

Question 30

In 2008, the S&P 500 index had an annual decline of

Answer 30

37 percent.

Question 31

During the 2008 financial crisis, the Icelandic stock exchange temporarily halted trading. What was the reaction of that market when trading resumed a few days later?

Answer 31

Decrease in excess of 75 percent

Question 32

The average squared difference between the actual return and the average return is called the

Answer 32

variance

Question 33

Avalanche, Inc., just declared an increase in its annual dividend from $.78 per share to $.96 per share. If the stock price should remain constant, then

Answer 33

the dividend yield would increase.

Question 34

Given a normal distribution, assume you want to earn a rate of return that plots more than three standard deviations above the mean. What is your probability of earning such a return in any one year?

Answer 34

.14 percent or less