TB CH1

Question 1

1 ) The total dollar return on a share of stock is defined as the:
A) change in the stock price divided by the original stock price.
B) annual dividend income received.
C) change in the price of the stock over a period of time.
D) dividend income divided by the beginning price per share.
E) capital gain or loss plus any dividend income.

Answer 1

E

Question 2

The dividend yield is defined as the annual dividend expressed as a percentage of the:
A) average stock price.
B) capital gain.
C) initial stock price.
D) total annual return.
E) ending stock price.

Answer 2

C

Question 3

3) The capital gains yield is equal to:
A) (Pt + 1 - Pt)/Pt.
B) (Pt + 1 - Pt)/Pt + 1.
C) (Pt - Pt + 1 + Dt + 1)/Pt + 1.
D) Dt + 1/Pt.
E) (Pt + 1 - Pt +Dt)/Pt.

Answer 3

A

Question 4

4) When the total return on an investment is expressed on a per-year basis it is called the:
A) effective annual return.
B) initial return.
C) capital gains yield.
D) dividend yield.
E) holding period return.

Answer 4

A

Question 5

5) The risk-free rate is:
A) another term for the dividend yield.
B) defined as the total of the capital gains yield plus the dividend yield.
C) the rate of return on a riskless investment.
D) the rate of return earned on an investment in a firm that you personally own.
E) defined as the increase in the value of a share of stock over time.

Answer 5

C

Question 6

6) The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the:
A) deflated rate of return.
B) risk premium.
C) expected rate of return.
D) market rate of return.
E) risk-free rate.

Answer 6

E

Question 7

7) The risk premium is defined as the rate of return on:
A) a U.S. Treasury bill.
B) a risky asset minus the risk-free rate.
C) a riskless investment.
D) the overall market.
E) a risky asset minus the inflation rate.

Answer 7

B

Question 8

8) The additional return earned for accepting risk is called the:
A) real return.
B) inflated return.
C) riskless rate.
D) risk premium.
E) capital gains yield.

Answer 8

D

Question 9

9) The standard deviation is a measure of:
A) total return.
B) changes in the capital gains rate.
C) volatility.
D) changes in dividend yields.
E) capital gains.

Answer 9

C

Question 10

10) A frequency distribution, which is completely defined by its average (mean) and variance or standard deviation, is referred to as a(n):
A) expected rate of return.
B) average geometric return.
C) average arithmetic return.
D) normal distribution.
E) variance distribution.

Answer 10

D

Question 11

11) The arithmetic average return is the:
A) average compound return earned per year over a multi-year period.
B) return earned in an average year over a multi-year period.
C) summation of the returns for a number of years, t, divided by (t -1).
D) average squared return earned in a single year.
E) compound total return for a period of years, t, divided by t.

Answer 11

B

Question 12

12) The average compound return earned per year over a multi-year period is called the:
A) average capital gains yield
B) arithmetic average return
C) total return
D) variance
E) geometric average return

Answer 12

E

Question 13

13) The average compound return earned per year over a multi-year period when inflows and outflows are considered is called the:
A) total return.
B) average capital gains yield.
C) geometric average return.
D) arithmetic average return.
E) dollar-weighted average return.

Answer 13

E

Question 14

14) Which one of the following statements is correct concerning the dividend yield and the total return?
A) The total return plus the capital gains yield is equal to the dividend yield.
B) The dividend yield can be zero while the total return must be a positive value.
C) The total return must be greater than the dividend yield.
D) The dividend yield exceeds the total return when a stock increases in value.
E) The total return can be negative but the dividend yield cannot be negative.

Answer 14

E

Question 15

15) An annualized return:
A) is computed as (1 + holding period percentage return)m, where m is the number of
holding periods in a year.
B) is computed as (1 + holding period percentage return)m, where m is the number of
months in the holding period.
C) is expressed as the summation of the capital gains yield and the dividend yield on
an investment.
D) is less than a holding period return when the holding period is less than one year.
E) is expressed as the capital gains yield that would have been realized if an investment had been held for a twelve-month period.

Answer 15

A

Question 16

17) Capital gains are included in the return on an investment:
A) when either the investment is sold or the investment has been owned for at least one
year.
B) only if the investment incurs a loss in value or is sold.
C) whether or not the investment is sold.
D) whenever dividends are paid.
E) only if the investment is sold and the capital gain is realized.

Answer 16

C

Question 17

18) When we refer to the rate of return on an investment, we are generally referring to the:
A) effective annual rate of return.
B) capital gains yield.
C) dividend yield.
D) annualized dividend yield.
E) total percentage return.

Answer 17

E

Question 18

19) Which one of the following should be used to compare the overall performance of three different investments?
A) effective annual return
B) holding period dollar return
C) holding period percentage return
D) dividend yield
E) capital gains yield

Answer 18

A

Question 19

20) If you multiply the number of shares outstanding for a stock by the price per share, you are computing the firm’s:
A) equity ratio.
B) total book value.
C) time value.
D) market share.
E) market capitalization.

Answer 19

E

Question 20

21) Which one of the following is considered the best method of comparing the returns on various-sized investments?
A) real dollar return
B) percentage return
C) total dollar return
D) absolute dollar return
E) variance return

Answer 20

B

Question 21

22) Which one of the following had the highest average return for the period 1926-2016?
A) small-company stocks
B) long-term government bonds
C) long-term corporate bonds
D) large-company stocks
E) U.S. Treasury bills

Answer 21

A

Question 22

23) Which one of the following statements is correct based on the historical returns for the period 1926-2016?
A) Small-company stocks outperformed large-company stocks every year during the period.
B) The inflation rate exceeded the rate of return on Treasury bills during some years.
C) For the period, large-company stocks outperformed small-company stocks.
D) For the period, Treasury bills yielded a higher rate of return than long-term
government bonds.
E) Bond prices, in general, were more volatile than stockprices.

Answer 22

B

Question 23

24) Which category(ies) of investments had an annual rate of return that exceeded 100 percent for at least one year during the period 1926-2016?
A) only small-company stocks
B) No category earned an annual return in excess of 100 percent for any given year
during the period
C) both large-company and small-company stocks
D) only large-company stocks
E) corporate bonds, large-company stocks, and small-company stocks

Answer 23

A

Question 24

25) For the period 1926-2016, the annual return on large-company stocks:
A) was unpredictable based on the prior year’s performance.
B) was negative following every three-year period of positivereturns.
C) was only negative for two or more consecutive years during the Great Depression.
D) remained negative for at least two consecutive years anytime that it was negative.
E) never exceeded a positive 30 percent nor lost more than 20percent.

Answer 24

A

Question 25

26) Which one of the following had the highest risk premium for the period 1926-2016?
A) small-company stocks
B) intermediate-term government bonds
C) U.S. Treasury bills
D) large-company stocks
E) long-term government bonds

Answer 25

A

Question 26

31) Which one of the following had the narrowest bell curve for the period 1926-2015?
A) large-company stocks
B) long-term corporate bonds
C) small-company stocks
D) U.S. Treasury bills
E) long-term government bonds

Answer 26

D

Question 27

32) Which one of the following had the greatest volatility of returns for the period 1926-2015?
A) long-term government bonds
B) long-term corporate bonds
C) U.S. Treasury bills
D) small-company stocks
E) large-company stocks

Answer 27

D

Question 28

33) Which one of the following had the smallest standard deviation of returns for the period 1926-2015?
A) intermediate-term government bonds
B) long-term corporate bonds
C) small-company stocks
D) long-term government bonds
E) large-company stocks

Answer 28

B

Question 29

34) For the period 1926-2015, long-term government bonds had an average return that ________ the average return on long-term corporate bonds while having a standard deviation that _________the standard deviation of the long-term corporate bonds.
A) was less than; was less than
B) exceeded; exceeded
C) exceeded;waslessthan
D) waslessthan;exceeded
E) exceeded; equaled

Answer 29

D

Question 30

35) The mean plus or minus one standard deviation defines the________ percent probability.
A) 95
B) 82
C) 90
D) 50
E) 68

Answer 30

E

Question 31

36) Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percent in corporate bonds. If you want to increase the potential annual return on this portfolio, you could:
A) replace the corporate bonds with intermediate-term government bonds.
B) decrease the investment in stocks and increase the investment in bonds.
C) reduce the expected volatility of the portfolio.
D) replace the corporate bonds with Treasury bills.
E) increase the standard deviation of the portfolio.

Answer 31

E

Question 32

37) Which one of the following statements is correct?
A) Large-company stocks are historically riskier than small-companystocks.
B) The standard deviation of the returns on Treasury bills is zero.
C) The standard deviation is a means of measuring the volatility of returns on an
investment.
D) A risky asset will always have a higher annual rate of return than a riskless asset.
E) There is an indirect relationship between risk and return.

Answer 32

C

Question 33

38) The wider the distribution of an investment’s returns over time, the_________ the expected average rate of return and the _________the expected volatility of those returns.
A) higher; higher
B) lower; lower
C) lower; higher
D) higher; lower
E) The distribution of returns does not affect the expected average rate of return.

Answer 33

A

Question 34

39) Which one of the following should be used as the mean return when you are defining the normal distribution of an investment’s annual rates of return?
A) geometric average return for the period divided by N - 1
B) arithmetic average return for the period divided by N - 1
C) geometric average return for the period
D) total return for the period divided by N - 1
E) arithmetic average return for the period

Answer 34

E

Question 35

40) The geometric mean return on large-company stocks for the 1926-2015 period:
A) is less than the arithmetic mean return.
B) is approximately equal to the arithmetic mean return plus one-half of the standard deviation.
C) exceeds the arithmetic mean return.
D) is approximately equal to the arithmetic mean return plus one-half of the variance.
E) is approximately equal to the arithmetic mean return minus one-half of the standard deviation.

Answer 35

A

Question 36

41) You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is:
A) greater than the geometric average return.
B) less than the geometric return and could be negative, zero, or positive.
C) positive but less than the geometric average return.
D) equal to the geometric average return.
E) either equal to or greater than the geometric average return.

Answer 36

A

Question 37

42) The geometric return on an investment is approximately equal to the arithmetic return:
A) minus half the standard deviation.
B) divided by two.
C) plus half the standard deviation.
D) plus half the variance.
E) minus half the variance.

Answer 37

E

Question 38

43) Blume’s formula is used to:
A) compute the historical mean returnover a multi-year period of time.
B) predict future rates of return.
C) measure past performance in a consistent manner.
D) convert an arithmetic average return into a geometric average return.
E) convert a geometric average return into an arithmetic average return.

Answer 38

B