Module 6

Question 1

Another term that refers to the average rate of return is the:

Answer 1

Mean

Question 2

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2017?

Answer 2

U.S. Treasury bills

Question 3

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

Answer 3

positive square root of the variance.

Question 4

One year ago, you purchased 300 shares of IXC stock at a price of $22.05 per share, received $460 in dividends over the year, and today sold all your shares for $29.32 per share. What was your dividend yield?

Answer 4

6.95 percent

Total Dividends / Initial Investment

$460/6615

Question 5

Winslow, Inc., stock is currently selling for $40 a share. The stock has a dividend yield of 3.8 percent. How much dividend income will you receive per year if you purchase 600 shares of this stock?

Answer 5

$912

Total Investment x Yield
24000*.038

Question 6

A year ago, you purchased 300 shares of New Tech stock at a price of $49.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all your shares for $58.14 per share. What is your total dollar return on this investment?

Answer 6

$2,763

Shares sold today + Dividends - Inital Investment
58.14300)+(.1300)-(49.03*300

Question 7

The primary purpose of portfolio diversification is to:

Answer 7

eliminate asset-specific risk.

Question 8

The systematic risk of the market is measured by a:

Answer 8

beta of 1.0.

Question 9

A security that is fairly priced will have a return that plots ________ the security market line.

Answer 9

on

Question 10

If the correlation between two stocks is −1, the returns on the stocks:

Answer 10

move perfectly opposite to one another.

Question 11

Standard deviation measures ________ risk while beta measures ________ risk.

Answer 11

total; systematic

Question 12

Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2 percent in a normal economy, and 12.6 percent in a recessionary economy. Each economic state is equally likely to occur. What is his expected rate of return on this stock?

Answer 12

10.17

=average(8.7,9.2,12.6)

Question 13

The stock of Big Joe’s has a beta of 1.38 and an expected return of 16.26 percent. The risk-free rate of return is 3.42 percent. What is the expected return on the market?

Answer 13

12.72 percent

CAPM = Rf + b(Rm-Rf)

Question 14

Zoom stock has a beta of 1.46. The risk-free rate of return is 3.07 percent and the market rate of return is 11.81 percent. What is the amount of the risk premium on Zoom stock?

Answer 14

12.76 percent

[Market Risk Premium] everything left of the (+)
CAPM = Rf + b(Rm-Rf)