Chapter 10

1. The average squared difference between

the actual return and the average return is
called the:

A.
B.
C.
D.
E.

2. The standard deviation for a set of stock

returns can be calculated as the:

A.
B.
C.
D.
E.

3. A symmetric, bell-shaped frequency

distribution that is completely defined by its
mean and standard deviation is the _____
distribution.

A.
B.
C.
D.
E.

4. The average compound return earned per

year over a multi-year period is called the
_____ average return.

A.
B.
C.
D.
E.
5. The return earned in an average year over a
multi-year period is called the _____ average
return.

A.
B.
C.
D.
E.

6. The excess return you earn by moving from

a relatively risk-free investment to a risky
investment is called the:

A.
B.
C.
D.
E.

7. The capital gains yield plus the dividend

yield on a security is called the:

A.
B.
C.
D.
E.

8. A portfolio of small-company common

stocks is best described as the stocks of the
firms which:

A.
B.
C.
D.
E.
9. Based on the period of 1926 through 2014,
_____ have tended to outperform other
securities over the long-term.

A.
B.
C.
D.
E.

10. Which one of the following types of

securities has tended to produce the lowest
real rate of return for the period 1926
through 2014?

A.
B.
C.
D.
E.

11. On average, for the period 1926 through

2014:

A.
B.
C.
D.
E.

12. Over the period of 1926 through 2014, the

annual rate of return on _____ has been
more volatile than the annual rate of return
on _____.

A.
B.
C.
D.
E.
13. Which one of the following is a correct
ranking of securities based on their volatility
over the period of 1926 to 2014? Rank from
highest to lowest.

A.
B.
C.
D.
E.

14. Over the period of 1926 to 2014, small

company stocks had an average return of
____ percent.

A.
B.
C.
D.
E.

15. Over the period of 1926 to 2014, the

average rate of inflation was _____ percent.

A.
B.
C.
D.
E.

16. The average annual return on long-term

corporate bonds for the period of 1926 to
2014 was ________ percent.

A.
B.
C.
D.
E.
17. The average annual return on small-
company stocks was about _____ percentage
points greater than the average annual
return on large-company stocks over the
period of 1926 to 2014.

A.

B.

C.
D.
E.

18. The average risk premium on U.S. Treasury

bills over the period of 1926 to 2014 was
_____ percent.

A.
B.
C.
D.
E.

19. Which one of the following is a correct

statement concerning risk premium?

A.
B.
C.
D.
E.

20. The risk premium is computed by ______ the

average return for the investment.

A.
B.
C.
D.
E.
21.
As part of an unexpected news
announcement, Alpha Co. stated that it is
increasing its annual dividend from $1.04
per share to $1.10 per share. What else
must the company have also announced if
its stock price and total expected return
remained constant following this
announcement? Assume none of the
announcement information was previously
expected by the market.

A.

B.
C.

D.
E.

22. The variance of returns is computed by

dividing the sum of the:

A.
B.
C.
D.
E.

23. Which one of the following statements

concerning the standard deviation is
correct?

A.
B.
C.
D.
E.
24. The standard deviation of small-company
stocks:

A.
B.
C.
D.
E.

25. Capital market history shows us that a

correct ordering of the average arithmetic
mean return for asset classes, from lowest
to highest, is:

A.
B.
C.
D.
E.

26. Which one of these countries tends to have

the highest stock market risk premium?

A.
B.
C.
D.
E.
27.
Which group of countries tends to have the
highest Sharpe ratios based on historical
equity risk premiums and standard
deviations of returns since 1900?

A.

B.

C.

D.

E.
28.
In estimating the future equity risk
premium, it is important to include
assumptions about the:

A.

B.

C.

D.

E.
29.
In estimating the future equity risk
premium, it is important to include
assumptions about the:

A.

B.

C.

D.

E.

30.
In 2008, the S&P 500 Index lost
approximately what percent of its value?

A.

B.

C.

D.

E.
31.
In 2008, which country experienced a
decline in its stock market value in excess of
90 percent?

A.

B.

C.

D.

E.

32.
In 2008, which asset class had the highest
rate of return in the U.S.?

A.

B.

C.

D.

E.
33. One year ago, you purchased a stock at a
price of $32.50. The stock pays quarterly
dividends of $.40 per share. Today, the stock
is worth $34.60 per share. What is the total
dollar return per share to date from this
investment?

A.
B.
C.
D.
E.

34. Six months ago, you purchased 100 shares

of stock in ABC Co. at a price of $43.89 a
share. ABC stock pays a quarterly dividend
of $.10 a share. Today, you sold all of your
shares for $45.13 per share. What is the
total amount of your capital gains on this
investment?

A.
B.
C.
D.
E.

35. A year ago, you purchased 500 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 of your
shares for $58.14 per share. What is your
total dollar return on this investment?

A.
B.
C.
D.
E.
36. You purchased 300 shares of stock at a price
of $21.72 per share. Over the last year, you
have received total dividend income of
$240. What is the dividend yield?

A.
B.
C.
D.
E.

37. 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
500 shares of this stock?

A.
B.
C.
D.
E.

38. One year ago, you purchased a stock at a

price of $32 a share. Today, you sold the
stock and realized a total return of 14.62
percent. Your capital gain was $3.48 a
share. What was your dividend yield on this
stock?

A.
B.
C.
D.
E.
39. You just sold 900 shares of Alcove stock at a
price of $34.08 a share. Last year you paid
$39.20 a share to buy this stock. You
received dividends totaling $1.04 per share.
What is your total capital gain on this
investment?

A.
B.
C.
D.

E.

40. You purchased 300 shares of Deltona stock

for $43.90 a share. You have received a total
of $630 in dividends and $14,620 in
proceeds from selling the shares. What is
your capital gains yield on this stock?

A.
B.
C.
D.
E.
41.
Today, you sold 300 shares of SLG stock and
realized a total return of 12.5 percent. You
purchased the shares one year ago at a
price of $27.43 a share. You have received a
total of $192 in dividends. What is your
capital gains yield on this investment?

A.

B.

C.

D.

E.

42. Six months ago, you purchased 1,200

shares of ABC stock for $21.20 a share and
have received total dividend payments of
$.60 a share. Today, you sold all of your
shares for $22.20 a share. What is your total
dollar return on this investment?

A.
B.
C.
D.
E.
43. Eight months ago, you purchased 400
shares of Winston stock at a price of $46.40
a share. The company pays quarterly
dividends of $1.05 a share. Today, you sold
all of your shares for $48.30 a share. What
is your total percentage return on this
investment?

A.
B.
C.
D.
E.

44. A stock had returns of 9%, -6%, 4%, and

16% over the past four years. What is the
standard deviation of these returns?

A.
B.
C.
D.
E.

45. A stock has an expected rate of return of 8.3

percent and a standard deviation of 6.4
percent. Which one of the following best
describes the probability that this stock will
lose 4.50 percent or more in any one given
year?

A.
B.
C.
D.
E.
46. A stock had annual returns of 3 percent, 18
percent, and -24 percent over a three-year
period. Based on this information, what is
the 68 percent probability range for any one
given year?

A.
B.

C.
D.
E.

47. A stock had annual returns of 8 percent, 14

percent, and 2 percent for the past three
years. Based on these returns, what is the
probability that this stock will earn at least
20 percent in any one given year?

A.
B.
C.
D.
E.

48.
A stock had returns of 16 percent, 4
percent, -22 percent, 15 percent, and -2
percent for the past five years. What is the
variance of these returns?

A.

B.
C.

D.
E.
49. A stock had returns of 8 percent, 39
percent, 11 percent, and -24 percent for the
past four years. Which one of the following
best describes the probability that this stock
will not lose more than 43 percent in any
one given year?

A.
B.
C.
D.
E.

50. Over the past four years, a stock produced

returns of 14 percent, 22 percent, 6 percent,
and -19 percent. What is the approximate
probability that an investor in this stock will
not lose more than 30 percent nor earn
more than 41 percent in any one given
year?

A.
B.
C.
D.
E.

51. What are the arithmetic and geometric

(Answer in that order) average returns for a
stock with annual returns of 4 percent, 9
percent, -6 percent, and 18 percent?

A.
B.
C.
D.
E.
52. What are the arithmetic and geometric
(Answer in that order.) average returns for a
stock with annual returns of 9.4 percent, 8.2
percent, -7.3 percent, 4.1 percent, and 9.5
percent?

A.
B.
C.
D.
E.

53. A stock had returns of 12 percent, 6

percent, 13 percent, -11 percent, and -2
percent over the past five years. What is the
geometric average return for this time
period?

A.
B.
C.
D.
E.

54. A stock was priced at $23.08, $24.15,

$23.99, and $24.26 at end of Years 1 to 4,
respectively, The annual dividend is
constant at $.20 a share. What is the
geometric average return on this stock?

A.
B.
C.
D.
E.
55. You bought 360 shares of stock at a total
cost of $7,754.40. You received a total of
$403.20 in dividends and sold your shares
for $19.98 a share. What was your total rate
of return?

A.
B.
C.

D.
E.

56. You bought 600 shares of stock at $24.20

each. At the end of the year, you received a
total of $720 in dividends, and your stock
was worth a total of $15,678. What was
your total dollar capital gain and total dollar
return?

A.
B.
C.
D.
E.

57. BCD shares are currently selling for $27.38

each. You bought 200 shares one year ago
at $26.59 and received dividend payments
of $1.27 per share. What was your
percentage capital gain for the year?

A.
B.
C.
D.
E.
58. Assume a stock had an historical equity risk
premium of 5.49 percent and a standard
deviation of 11.46 percent over the past two
decades. What is the 95.4 percent range for
the equity risk premium?

A.
B.
C.
D.
E.

59. Assume that over the past 85 years, the

total annual returns on large-company
common stocks averaged 12.3 percent,
small-company stocks averaged 17.4
percent, long-term government bonds
averaged 5.7 percent, and U.S. T-bills
averaged 3.8 percent. What was the
average risk premium earned by long-term
government bonds, and small-company
stocks respectively?

A.
B.
C.
D.
E.

60. The returns on a portfolio over the last five

years were: --5.2 percent, 21.6 percent, 4.5
percent, 11.7 percent, and 5.9 percent.
What is the standard deviation of these
returns?

A.
B.
C.
D.
E.
61.
Suppose you own a risky asset with an
expected return of 12.6 percent and a
standard deviation of 18.2 percent. If the
returns are normally distributed, the most
accurate probability that the stock will
return more than 50 percent in any one
given year is less than:

A.

B.
C.

D.
E.

62. The return pattern on your favorite stock

has been 5.39 percent, 8.26 percent, -12.04
percent, and 14.27 percent over the last
four years. What are the average arithmetic
and geometric rates of return?

A.
B.
C.
D.
E.
63. You invested in long-term corporate bonds
and earned 6.1 percent. During that same
time period, large-company stocks returned
12.6 percent, long-term government bonds
returned 5.7 percent, U.S. Treasury bills
returned 4.2 percent, and inflation averaged
3.8 percent. What average risk premium did
you earn?

A.
B.
C.
D.
E.

64. You have a sampling of returns for the Malta

Stock Fund. The returns are 7.25 percent,
5.63 percent, 12.56 percent, and 1.08
percent. What is the average arithmetic
return and variance of this sampling?

A.
B.
C.
D.
E.

65. One year ago, you purchased a stock at a

price of $33.48. The stock paid quarterly
dividends of $.60 per share. Today, the stock
is worth $35.20 per share. What is your
holding period total return?

A.
B.
C.
D.
E.
66. Six months ago, you purchased 100 shares
of stock in ABC at a price of $43.26 a share.
The stock pays a quarterly dividend of $.10
a share. Today, you sold all of your shares
for $46.71 per share. What is your holding
period total return?

A.
B.
C.
D.
E.

67. 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 of your shares for $29.32
per share. What was your dividend yield?

A.
B.
C.
D.
E.

68. You purchased 300 shares of stock at a price

of $37.23 per share. Over the last year, you
have received total dividend income of
$351. What is the capital gains yield if your
total return is 11.47 percent?

A.
B.
C.
D.
E.
69. Winslow, Inc. stock is currently selling for
$59.48 a share. The stock has an expected
growth rate of 4.22 percent and an
expected total return for the next year of
9.87 percent. How much dividend income
should you expect to receive next year if
you purchase 800 shares of this stock
today?

A.

B.

C.

D.
E.

70. A stock had annual returns of 7.63 percent,

9.28 percent, -3.11 percent, and 15.09
percent for the past four years, respectively.
What is the real average rate of return for
this period if inflation averaged 2.3
percent?

A.
B.
C.
D.
E.
71. Assume you are comparing two stocks that
are identical in every way except that one
stock pays dividends and the other does
not. How would you expect this difference to
affect the annual performance of the
dividend-paying stock as compared to the
non-dividend-paying stock?

72. What does the historical record reveal about

the relationship between the returns on U.S.
Treasury bills and the rate of inflation as
measured by the consumer price index? Is
this relationship what investors would tend
to expect? Why or why not?

73. Based on historical market performance,

what can we conclude about the
relationship between return and risk?
74. What are the lessons learned from capital
market history? What evidence is there to
suggest these lessons are correct?

75. Suppose you have $30,000 invested in the

stock market and your banker comes to you
and tries to get you to move that money
into the bank's certificates of deposit (CDs).
He explains that the CDs are 100 percent
government insured and that you are taking
unnecessary risks by being in the stock
market. How would you respond?
 Chapter 10 Key
1. The average squared difference between
the actual return and the average return is
called the:

A.
B.
C.
D.
E.
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Difficulty: 1 Basic
Ross - Chapter 10 #1
Section: 10.5
Topic: Standard deviation and variance

2. The standard deviation for a set of stock

returns can be calculated as the:

A.
B.
C.
D.
E.
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Difficulty: 1 Basic
Ross - Chapter 10 #2
Section: 10.5
Topic: Standard deviation and variance

3. A symmetric, bell-shaped frequency

distribution that is completely defined by its
mean and standard deviation is the _____
distribution.

A.
B.
C.
D.
E.
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 Difficulty: 1 Basic
Ross - Chapter 10 #3
Section: 10.5
Topic: Normal probability distribution

4. The average compound return earned per

year over a multi-year period is called the
_____ average return.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #4
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

5. The return earned in an average year over a

multi-year period is called the _____ average
return.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #5
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

6. The excess return you earn by moving from

a relatively risk-free investment to a risky
investment is called the:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #6
Section: 10.4
 Topic: Risk premium

7. The capital gains yield plus the dividend

yield on a security is called the:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #7
Section: 10.1
Topic: Total return

8. A portfolio of small-company common

stocks is best described as the stocks of the
firms which:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #8
Section: 10.2
Topic: Asset classes

9. Based on the period of 1926 through 2014,

_____ have tended to outperform other
securities over the long-term.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #9
Section: 10.2
Topic: Historical performance
10. Which one of the following types of
securities has tended to produce the lowest
real rate of return for the period 1926
through 2014?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #10
Section: 10.3
Topic: Historical performance

11. On average, for the period 1926 through

2014:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #11
Section: 10.3
Topic: Historical performance

12. Over the period of 1926 through 2014, the

annual rate of return on _____ has been
more volatile than the annual rate of return
on _____.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #12
Section: 10.3
Topic: Historical performance
13. Which one of the following is a correct
ranking of securities based on their volatility
over the period of 1926 to 2014? Rank from
highest to lowest.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #13
Section: 10.3
Topic: Historical performance

14. Over the period of 1926 to 2014, small

company stocks had an average return of
____ percent.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #14
Section: 10.3
Topic: Historical performance

15. Over the period of 1926 to 2014, the

average rate of inflation was _____ percent.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #15
Section: 10.3
Topic: Historical performance
16. The average annual return on long-term
corporate bonds for the period of 1926 to
2014 was ________ percent.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #16
Section: 10.3
Topic: Historical performance

17. The average annual return on small-

company stocks was about _____ percentage
points greater than the average annual
return on large-company stocks over the
period of 1926 to 2014.

A.

B.

C.
D.
E.
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Ross - Chapter 10 #17
Section: 10.3
Topic: Historical performance

18. The average risk premium on U.S. Treasury

bills over the period of 1926 to 2014 was
_____ percent.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #18
Section: 10.4
Topic: Risk premium

19. Which one of the following is a correct

statement concerning risk premium?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #19
Section: 10.5
Topic: Risk premium

20. The risk premium is computed by ______ the

average return for the investment.

A.
B.
C.
D.
E.
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Ross - Chapter 10 #20
Section: 10.4
Topic: Risk premium
21.
As part of an unexpected news
announcement, Alpha Co. stated that it is
increasing its annual dividend from $1.04
per share to $1.10 per share. What else
must the company have also announced if
its stock price and total expected return
remained constant following this
announcement? Assume none of the
announcement information was previously
expected by the market.

A.

B.
C.

D.
E.
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Ross - Chapter 10 #21
Section: 10.1
Topic: Total return

22. The variance of returns is computed by

dividing the sum of the:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #22
Section: 10.5
Topic: Standard deviation and variance
23. Which one of the following statements
concerning the standard deviation is
correct?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #23
Section: 10.5
Topic: Standard deviation and variance

24. The standard deviation of small-company

stocks:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #24
Section: 10.5
Topic: Standard deviation and variance

25. Capital market history shows us that a

correct ordering of the average arithmetic
mean return for asset classes, from lowest
to highest, is:

A.
B.
C.
D.
E.
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Ross - Chapter 10 #25
Section: 10.5
Topic: Historical performance
26. Which one of these countries tends to have
the highest stock market risk premium?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #26
Section: 10.7
Topic: International investing - risks, returns, and benefits

27.
(p. $$pageTag$$)
Which group of countries tends to have the
highest Sharpe ratios based on historical
equity risk premiums and standard
deviations of returns since 1900?

A.

B.

C.

D.

E.

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Ross - Chapter 10 #27
28.
(p. $$pageTag$$)
In estimating the future equity risk
premium, it is important to include
assumptions about the:

A.

B.

C.

D.

E.

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Ross - Chapter 10 #28
29.
(p. $$pageTag$$)
In estimating the future equity risk
premium, it is important to include
assumptions about the:

A.

B.

C.

D.

E.

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Ross - Chapter 10 #29
30.
(p. $$pageTag$$)
In 2008, the S&P 500 Index lost
approximately what percent of its value?

A.

B.

C.

D.

E.

AACSB: Analytical Thinking

Ross - Chapter 10 #30
31.
(p. $$pageTag$$)
In 2008, which country experienced a
decline in its stock market value in excess of
90 percent?

A.

B.

C.

D.

E.

AACSB: Analytical Thinking

Ross - Chapter 10 #31
32.
(p. $$pageTag$$)
In 2008, which asset class had the highest
rate of return in the U.S.?

A.

B.

C.

D.

E.

AACSB: Analytical Thinking

Ross - Chapter 10 #32

33. One year ago, you purchased a stock at a

price of $32.50. The stock pays quarterly
dividends of $.40 per share. Today, the stock
is worth $34.60 per share. What is the total
dollar return per share to date from this
investment?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #33
Section: 10.1
Topic: Dollar and percentage yields and returns
34. Six months ago, you purchased 100 shares
of stock in ABC Co. at a price of $43.89 a
share. ABC stock pays a quarterly dividend
of $.10 a share. Today, you sold all of your
shares for $45.13 per share. What is the
total amount of your capital gains on this
investment?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #34
Section: 10.1
Topic: Dollar and percentage yields and returns

35. A year ago, you purchased 500 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 of your
shares for $58.14 per share. What is your
total dollar return on this investment?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #35
Section: 10.1
Topic: Dollar and percentage yields and returns
36. You purchased 300 shares of stock at a price
of $21.72 per share. Over the last year, you
have received total dividend income of
$240. What is the dividend yield?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #36
Section: 10.1
Topic: Dollar and percentage yields and returns

37. 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
500 shares of this stock?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #37
Section: 10.1
Topic: Dollar and percentage yields and returns

38. One year ago, you purchased a stock at a

price of $32 a share. Today, you sold the
stock and realized a total return of 14.62
percent. Your capital gain was $3.48 a
share. What was your dividend yield on this
stock?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #38
Section: 10.1
Topic: Dollar and percentage yields and returns

39. You just sold 900 shares of Alcove stock at a

price of $34.08 a share. Last year you paid
$39.20 a share to buy this stock. You
received dividends totaling $1.04 per share.
What is your total capital gain on this
investment?

A.
B.
C.
D.

E.

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Ross - Chapter 10 #39
Section: 10.1
Topic: Dollar and percentage yields and returns

40. You purchased 300 shares of Deltona stock

for $43.90 a share. You have received a total
of $630 in dividends and $14,620 in
proceeds from selling the shares. What is
your capital gains yield on this stock?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #40
Section: 10.1
Topic: Dollar and percentage yields and returns
41.
Today, you sold 300 shares of SLG stock and
realized a total return of 12.5 percent. You
purchased the shares one year ago at a
price of $27.43 a share. You have received a
total of $192 in dividends. What is your
capital gains yield on this investment?

A.

B.

C.

D.

E.

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Ross - Chapter 10 #41
Section: 10.1
Topic: Dollar and percentage yields and returns

42. Six months ago, you purchased 1,200

shares of ABC stock for $21.20 a share and
have received total dividend payments of
$.60 a share. Today, you sold all of your
shares for $22.20 a share. What is your total
dollar return on this investment?

A.
B.
C.
D.
E.
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 Ross - Chapter 10 #42
Section: 10.1
Topic: Dollar and percentage yields and returns

43. Eight months ago, you purchased 400

shares of Winston stock at a price of $46.40
a share. The company pays quarterly
dividends of $1.05 a share. Today, you sold
all of your shares for $48.30 a share. What
is your total percentage return on this
investment?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #43
Section: 10.1
Topic: Dollar and percentage yields and returns

44. A stock had returns of 9%, -6%, 4%, and

16% over the past four years. What is the
standard deviation of these returns?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #44
Section: 10.5
Topic: Standard deviation and variance
45. A stock has an expected rate of return of 8.3
percent and a standard deviation of 6.4
percent. Which one of the following best
describes the probability that this stock will
lose 4.50 percent or more in any one given
year?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #45
Section: 10.5
Topic: Normal probability distribution

46. A stock had annual returns of 3 percent, 18

percent, and -24 percent over a three-year
period. Based on this information, what is
the 68 percent probability range for any one
given year?

A.
B.

C.
D.
E.
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Ross - Chapter 10 #46
Section: 10.5
Topic: Normal probability distribution
47. A stock had annual returns of 8 percent, 14
percent, and 2 percent for the past three
years. Based on these returns, what is the
probability that this stock will earn at least
20 percent in any one given year?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #47
Section: 10.5
Topic: Normal probability distribution

48.
A stock had returns of 16 percent, 4
percent, -22 percent, 15 percent, and -2
percent for the past five years. What is the
variance of these returns?

A.

B.
C.

D.
E.
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Ross - Chapter 10 #48
Section: 10.5
Topic: Standard deviation and variance
49. A stock had returns of 8 percent, 39
percent, 11 percent, and -24 percent for the
past four years. Which one of the following
best describes the probability that this stock
will not lose more than 43 percent in any
one given year?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #49
Section: 10.5
Topic: Normal probability distribution

50. Over the past four years, a stock produced

returns of 14 percent, 22 percent, 6 percent,
and -19 percent. What is the approximate
probability that an investor in this stock will
not lose more than 30 percent nor earn
more than 41 percent in any one given
year?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #50
Section: 10.5
Topic: Normal probability distribution
51. What are the arithmetic and geometric
(Answer in that order) average returns for a
stock with annual returns of 4 percent, 9
percent, -6 percent, and 18 percent?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #51
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

52. What are the arithmetic and geometric

(Answer in that order.) average returns for a
stock with annual returns of 9.4 percent, 8.2
percent, -7.3 percent, 4.1 percent, and 9.5
percent?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #52
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

53. A stock had returns of 12 percent, 6

percent, 13 percent, -11 percent, and -2
percent over the past five years. What is the
geometric average return for this time
period?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #53
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

54. A stock was priced at $23.08, $24.15,

$23.99, and $24.26 at end of Years 1 to 4,
respectively, The annual dividend is
constant at $.20 a share. What is the
geometric average return on this stock?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #54
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

55. You bought 360 shares of stock at a total

cost of $7,754.40. You received a total of
$403.20 in dividends and sold your shares
for $19.98 a share. What was your total rate
of return?

A.
B.
C.

D.
E.
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Ross - Chapter 10 #55
Section: 10.1
Topic: Dollar and percentage yields and returns
56. You bought 600 shares of stock at $24.20
each. At the end of the year, you received a
total of $720 in dividends, and your stock
was worth a total of $15,678. What was
your total dollar capital gain and total dollar
return?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #56
Section: 10.1
Topic: Dollar and percentage yields and returns

57. BCD shares are currently selling for $27.38

each. You bought 200 shares one year ago
at $26.59 and received dividend payments
of $1.27 per share. What was your
percentage capital gain for the year?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #57
Section: 10.1
Topic: Dollar and percentage yields and returns
58. Assume a stock had an historical equity risk
premium of 5.49 percent and a standard
deviation of 11.46 percent over the past two
decades. What is the 95.4 percent range for
the equity risk premium?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #58
Section: 10.7
Topic: Risk premium

59. Assume that over the past 85 years, the

total annual returns on large-company
common stocks averaged 12.3 percent,
small-company stocks averaged 17.4
percent, long-term government bonds
averaged 5.7 percent, and U.S. T-bills
averaged 3.8 percent. What was the
average risk premium earned by long-term
government bonds, and small-company
stocks respectively?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #59
Section: 10.4
Topic: Risk premium
60. The returns on a portfolio over the last five
years were: --5.2 percent, 21.6 percent, 4.5
percent, 11.7 percent, and 5.9 percent.
What is the standard deviation of these
returns?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #60
Section: 10.5
Topic: Standard deviation and variance

61.
Suppose you own a risky asset with an
expected return of 12.6 percent and a
standard deviation of 18.2 percent. If the
returns are normally distributed, the most
accurate probability that the stock will
return more than 50 percent in any one
given year is less than:

A.

B.
C.

D.
E.
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Ross - Chapter 10 #61
Section: 10.5
Topic: Normal probability distribution
62. The return pattern on your favorite stock
has been 5.39 percent, 8.26 percent, -12.04
percent, and 14.27 percent over the last
four years. What are the average arithmetic
and geometric rates of return?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #62
Section: 10.6
Topic: Arithmetic, geometric, and dollar-weighted returns

63. You invested in long-term corporate bonds

and earned 6.1 percent. During that same
time period, large-company stocks returned
12.6 percent, long-term government bonds
returned 5.7 percent, U.S. Treasury bills
returned 4.2 percent, and inflation averaged
3.8 percent. What average risk premium did
you earn?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #63
Section: 10.4
Topic: Risk premium
64. You have a sampling of returns for the Malta
Stock Fund. The returns are 7.25 percent,
5.63 percent, 12.56 percent, and 1.08
percent. What is the average arithmetic
return and variance of this sampling?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #64
Section: 10.5
Topic: Standard deviation and variance

65. One year ago, you purchased a stock at a

price of $33.48. The stock paid quarterly
dividends of $.60 per share. Today, the stock
is worth $35.20 per share. What is your
holding period total return?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #65
Section: 10.1
Topic: Total return
66. Six months ago, you purchased 100 shares
of stock in ABC at a price of $43.26 a share.
The stock pays a quarterly dividend of $.10
a share. Today, you sold all of your shares
for $46.71 per share. What is your holding
period total return?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #66
Section: 10.1
Topic: Total return

67. 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 of your shares for $29.32
per share. What was your dividend yield?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #67
Section: 10.1
Topic: Dollar and percentage yields and returns
68. You purchased 300 shares of stock at a price
of $37.23 per share. Over the last year, you
have received total dividend income of
$351. What is the capital gains yield if your
total return is 11.47 percent?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #68
Section: 10.1
Topic: Dollar and percentage yields and returns

69. Winslow, Inc. stock is currently selling for

$59.48 a share. The stock has an expected
growth rate of 4.22 percent and an
expected total return for the next year of
9.87 percent. How much dividend income
should you expect to receive next year if
you purchase 800 shares of this stock
today?

A.

B.

C.

D.
E.
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Ross - Chapter 10 #69
Section: 10.1
Topic: Dollar and percentage yields and returns
70. A stock had annual returns of 7.63 percent,
9.28 percent, -3.11 percent, and 15.09
percent for the past four years, respectively.
What is the real average rate of return for
this period if inflation averaged 2.3
percent?

A.
B.
C.
D.
E.
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Ross - Chapter 10 #70
Section: 10.1
Topic: Nominal and real return

71. Assume you are comparing two stocks that

are identical in every way except that one
stock pays dividends and the other does
not. How would you expect this difference to
affect the annual performance of the
dividend-paying stock as compared to the
non-dividend-paying stock?

The presence of dividends increases a

positive total rate of return and decreases a
negative rate of return (causing the return
to be less negative, zero, or even positive).
In other words, the dividend yield increases
the total return.

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Ross - Chapter 10 #71
Section: 10.1
Topic: Total return
72. What does the historical record reveal about
the relationship between the returns on U.S.
Treasury bills and the rate of inflation as
measured by the consumer price index? Is
this relationship what investors would tend
to expect? Why or why not?

Historically, the relationship between U.S.

Treasury bills and the inflation rate is a
mixed bag. In other words, sometimes T-bills
outperform inflation and other times T-bills
underperform inflation. Investors would tend
to expect to earn a positive real rate of
return, but in many years, this does not
occur causing investors to lose purchasing
power on their T-bill investments. <i>

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Ross - Chapter 10 #72
Section: 10.3
Topic: Historical performance

73. Based on historical market performance,

what can we conclude about the
relationship between return and risk?

Historical performance clearly illustrates

that returns and risks are directly related
over the long-term. The greater the risk, the
greater the expected return. For any one
period, however, the actual return may vary
significantly from the expected return-that’s
the risk. <i>

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Ross - Chapter 10 #73
Section: 10.2
Topic: Historical performance
74. What are the lessons learned from capital
market history? What evidence is there to
suggest these lessons are correct?

First, there is a reward for bearing risk, and

second, the greater the risk, the greater the
reward. As evidence, the students should
provide a brief discussion of the historical
rates of return and standard deviation of
returns of the various asset classes
discussed in the text. <i>

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Ross - Chapter 10 #74
Section: 10.2
Topic: Historical performance

75. Suppose you have $30,000 invested in the

stock market and your banker comes to you
and tries to get you to move that money
into the bank's certificates of deposit (CDs).
He explains that the CDs are 100 percent
government insured and that you are taking
unnecessary risks by being in the stock
market. How would you respond?

The usual response is that bank CDs

typically will offer a very low rate of return
because of their low level of risk. Even if
students do not know the relationship
between yields on CDs and historical returns
on stocks, they should recognize that
because of the risk differences the CDs must
have a lower expected return. So, if the
investor in the question is willing to trade off
some safety in order to have the chance to
earn larger returns, the stock market is the
correct investment. <i>

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Ross - Chapter 10 #75
Section: 10.2
Chapter 10 Summary