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Exam 12: Some Lessons From Capital Market History

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Question 31

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Which one of the following statements correctly applies to the period 1926-2010?

A) Large-company stocks earned a higher average risk premium than did small-company stocks.
B) Intermediate-term government bonds had a higher average return than long-term corporate bonds.
C) Large-company stocks had an average annual return of 14.7 percent.
D) Inflation averaged 2.6 percent for the period.
E) U.S.Treasury bills had a positive average real rate of return.

F) C) and E)
G) A) and E)

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Question 32

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Assume that you invest in a portfolio of large-company stocks.Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010.What rate of return should you expect to earn?

A) less than 10 percent
B) between 10 and 12.5 percent
C) between 12.5 and 15 percent
D) between 15 and 17.5 percent
E) more than 17.5 percent

F) B) and C)
G) A) and B)

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Question 33

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Which one of the following correctly describes the dividend yield?

One year ago,you purchased a stock at a price of $47.50 a share.Today,you sold the stock and realized a total loss of 22.11 percent.Your capital gain was -$12.70 a share.What was your dividend yield?

Over the past five years,a stock produced returns of 11 percent,14 percent,4 percent,-9 percent,and 5 percent.What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Suppose you bought a 10 percent coupon bond one year ago for $950.The face value of the bond is $1,000.The bond sells for $985 today.If the inflation rate last year was 9 percent,what was your total real rate of return on this investment?

Today,you sold 200 shares of Indian River Produce stock.Your total return on these shares is 6.2 percent.You purchased the shares one year ago at a price of $31.10 a share.You have received a total of $100 in dividends over the course of the year.What is your capital gains yield on this investment?

What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.

The excess return is computed as the:

Four months ago,you purchased 1,500 shares of Lakeside Bank stock for $11.20 a share.You have received dividend payments equal to $0.25 a share.Today,you sold all of your shares for $8.60 a share.What is your total dollar return on this investment?

A stock had the following prices and dividends.What is the geometric average return on this stock?

What was the average rate of inflation over the period of 1926-2010?

Efficient financial markets fluctuate continuously because:

How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 3 percent,-10 percent,24 percent,22 percent,and 12 percent.Suppose the average inflation rate over this time period was 3.6 percent and the average T-bill rate was 4.8 percent.Based on this information,what was the average nominal risk premium?

The U.S.Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits.Given this,you would be most apt to argue that the markets are less than _____ form efficient.

If the variability of the returns on large-company stocks were to increase over the long-term,you would expect which of the following to occur as a result? I.decrease in the average rate of return II.increase in the risk premium III.increase in the 68 percent probability range of the frequency distribution of returns IV.decrease in the standard deviation

Last year,T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent.Which one of the following terms refers to the difference between these two rates of return?

A stock had returns of 16 percent,4 percent,8 percent,14 percent,-9 percent,and -5 percent over the past six years.What is the geometric average return for this time period?