Fundamentals of Investments 5th Edition Test Bank

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1Student: ___________________________________________________________________________1.The total dollar return on a share of stock is defined as the:A.change in the price of the stock over a period of time.B.dividend income divided bythe beginning price per share.C.capital gain or loss plus any dividend income.D.change in the stock price divided by the original stock price.E.annual dividend income received.2.The dividend yield is defined as the annualdividend expressed as a percentage of the:A.average stock price.B.initial stock price.C.ending stock price.D.total annual return.E.capital gain.3.The capital gains yield is equal to:A.(Pt-Pt + 1+ Dt + 1) / Pt +1.B.(Pt + 1-Pt+ Dt) / Pt.C.Dt + 1/ Pt.D.(Pt + 1-Pt) / Pt.E.(Pt + 1-Pt) / Pt + 1.4.When the total return on an investment is expressed on a per-year basis it is called the:A.capital gains yield.B.dividend yield.C.holding period return.D.effective annual return.E.initial return.

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5.The risk-free rate is:A.another term for the dividend yield.B.defined as the increase in the value of a share of stock over time.C.the rate of return earned on an investment in a firm that you personally own.D.defined as the total of the capital gains yield plus the dividend yield.E.the rate of return on a riskless investment.6.The rate of return earned on a U.S.Treasury bill is referred to as the:A.risk premium.B.deflated rate of return.C.risk-free rate.D.expected rate of return.E.market rate of return.7.The risk premium is defined as the rate of return on:A.a riskyasset minus the risk-free rate.B.the overall market.C.a U.S. Treasury bill.D.a risky asset minus the inflation rate.E.a riskless investment.8.The additional return earned for accepting risk is called the:A.inflatedreturn.B.capital gains yield.C.real return.D.riskless rate.E.risk premium.9.The standard deviation is a measure of:A.volatility.B.total return.C.capital gains.D.changes in dividend yields.E.changes in the capital gains rate.

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10.A frequency distribution, which is completely defined by its average and standard deviation, isreferred to as a(n):A.normal distribution.B.variance distribution.C.expected rate of return.D.average geometric return.E.average arithmetic return.11.The arithmetic average return is the:A.summation of the returns for a number of years, t, divided by (t-1).B.compound total return for a period of years, t,divided by t.C.average compound return earned per year over a multiyear period.D.average squared return earned in a single year.E.return earned in an average year over a multiyear period.12.The average compound return earned peryear over a multiyear period is called the:A.total return.B.average capital gains yield.C.variance.D.arithmetic average return.E.geometric average return.13.Which one of the following statements is correctconcerning the dividend yield and the totalreturn?A.The dividend yield can be zero while the total return must be a positive value.B.The total return can be negative but the dividend yield cannot be negative.C.The total return must begreater than the dividend yield.D.The total return plus the capital gains yield is equal to the dividend yield.E.The dividend yield exceeds the total return when a stock increases in value.

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14.An annualized return:A.is less than aholding period return when the holding period is less than one year.B.is expressed as the summation of the capital gains yield and the dividend yield on aninvestment.C.is expressed as the capital gains yield that would have been realized if an investment hadbeen held for a twelve-month period.D.is computed as (1 + holding period percentage return)m, where m is the number of holdingperiods in a year.E.is computed as (1 + holding period percentage return)m, where m is the number ofmonths inthe holding period.15.Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before resellingit. What is the value of "m" when computing the annualized return on this investment?A..25B..33C..40D.3.00E.4.0016.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 is sold and the capital gain isrealized.C.whenever dividends are paid.D.whether or not the investment is sold.E.only if the investment incurs a loss in value or is sold.17.When we refer to the rate of return on an investment, we are generally referring to the:A.capital gains yield.B.effective annual rate of return.C.total percentage return.D.dividend yield.E.annualized dividend yield.

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18.Which one of the following should be used to compare the overall performance of threedifferentinvestments?A.holding period dollar returnB.capital gains yieldC.dividend yieldD.holding period percentage returnE.effective annual return19.If you multiply the number of shares of outstanding stock for afirm by the price per share, you arecomputing the firm's:A.equity ratio.B.total book value.C.market share.D.market capitalization.E.time value.20.Which one of the following is considered the best method ofcomparing the returns on various-sized investments?A.total dollar returnB.real dollar returnC.absolute dollar returnD.percentage returnE.variance return21.Which one of the following had the highest average return forthe period 1926-2006?A.large-company stocksB.U.S. Treasury billsC.long-term government bondsD.small-company stocksE.long-term corporate bonds

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22.Which one of the following statements is correct based on thehistorical returns for the period1926-2006?A.For the period, Treasury bills yielded a higher rate of return than long-term government bonds.B.The inflation rate exceeded the rate of return on Treasury bills during some years.C.Small-company stocks outperformed large-company stocks every year during the period.D.Bond prices, in general, were more volatile than stock prices.E.For the period, large-company stocks outperformed small-company stocks.23.Inflation, as measured by the Consumer Price Index, was highest during the period:A.1930-1935.B.1952-1957.C.1977-1982.D.1992-1997.E.2001-2006.24.Large-company stocks produced the highest rates of return during theperiod:A.1939-1941.B.1969-1970.C.1995-1997.D.2000-2002.E.2004-2006.25.Which category(ies) of investments had an annual rate of return that exceeded 100 percent for atleast one year during the period 1926-2006?A.only large-company stocksB.both large-company and small-company stocksC.only small-company stocksD.corporate bonds, large-company stocks, and small-company stocksE.No category earned an annual return in excess of 100 percent for any given year during theperiod.26.For the period 1926-2006, the annual return on large-company stocks:A.was negative following every three-year period of positive returns.B.was only negative for two or more consecutive years during theGreat Depression.C.remained negative for at least two consecutive years anytime that it was negative.D.never exceeded a positive 30 percent nor lost more than 20 percent.E.was unpredictable based on the prior year's performance.

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27.Which one of the following had the highest risk premium for the period 1926-2006?A.U.S. Treasury billsB.long-term government bondsC.large-company stocksD.small-company stocksE.intermediate-term government bonds28.Based on the period 1926-2006, the risk premium for U.S. Treasury bills was:A.0.0 percent.B.1.2 percent.C.2.0 percent.D.2.4 percent.E.2.7 percent.29.Based on the period of 1926-2006, the risk premium forsmall-company stocks averaged:A.12.3 percent.B.13.6 percent.C.15.0 percent.D.16.8 percent.E.17.4 percent.30.The average risk premium on large-company stocks for the period 1926-2006 was:A.6.7 percent.B.7.8percent.C.8.5 percent.D.12.3 percent.E.13.6 percent.31.The average risk premium on long-term corporate bonds for the period 1926-2006 was:A.2.4 percent.B.2.8 percent.C.3.3 percent.D.3.7 percent.E.3.9percent.

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32.Which of the following categories of investments earned positive returns during both the bearmarket of 1973-74 and the bear market of 2000-01?I. GoldII. Treasury billsIII. Foreign marketsA.I onlyB.II onlyC.III onlyD.I and II onlyE.I, II, and III33.The largest one-day percentage decline in the Dow-Jones Industrial Average during the period1926-2006 occurred on:A.October 19, 1987.B.October 28, 1929.C.September 17, 2001.D.November 6, 1929.E.July 19, 2002.34.The largest one-day point decline in the Dow-Jones Industrial Average during the period 1926-2006 occurred on:A.October 19, 1987.B.October 28, 1929.C.September 17, 2001.D.November 6, 1929.E.July 19,2002.35.Which one of the following had the narrowest bell curve for the period 1926-2006?A.large-company stocksB.long-term corporate bondsC.long-term government bondsD.small-company stocksE.U.S. Treasury bills

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36.Which one of the following had the greatest volatility of returns for the period 1926-2006?A.large-company stocksB.U.S. Treasury billsC.long-term government bondsD.small-company stocksE.long-term corporate bonds37.Which one of the following had the smallest standard deviation of returns for the period 1926-2006?A.large-company stocksB.small-company stocksC.long-term government bondsD.intermediate-term government bondsE.long-termcorporate bonds38.For the period 1926-2006, long-term government bonds had an average return that ______ theaverage return on long-term corporate bonds while having a standard deviation that _______ thestandard deviation of the long-termcorporate bonds.A.exceeded; was less thanB.exceeded; equaledC.exceeded; exceededD.was less than; exceededE.was less than; was less than39.The mean plus or minus one standard deviation defines the _____ percentprobability range of anormal distribution.A.50B.68C.82D.90E.95

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40.Assume you own a portfolio that is invested 50 percent in large-company stocks and 50 percentin corporate bonds. If you want to increase thepotential annual return on this portfolio, you could:A.decrease the investment in stocks and increase the investment in bonds.B.replace the corporate bonds with intermediate-term government bonds.C.replace the corporate bonds withTreasury bills.D.increase the standard deviation of the portfolio.E.reduce the expected volatility of the portfolio.41.Which one of the following statements is correct?A.The standard deviation of the returns on Treasury bills iszero.B.Large-company stocks are historically riskier than small-company stocks.C.The variance 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 ariskless asset.E.There is an indirect relationship between risk and return.42.The wider the distribution of an investment's returns over time, the _____ the expected averagerate of return and the ______ the expected volatility of thosereturns.A.higher; higherB.higher; lowerC.lower; higherD.lower; lowerE.The distribution of returns does not affect the expected average rate of return.43.Which one of the following should be used as the mean return whenyou are defining the normaldistribution of an investment's annual rates of return?A.arithmetic average return for the periodB.geometric average return for the periodC.total return for the period divided by N-1D.arithmeticaverage return for the period divided by N-1E.geometric average return for the period divided by N-144.The geometric mean return on large-company stocks for the 1926-2006 period:A.is approximately equal to the arithmetic meanreturn plus one-half of the standard deviation.B.exceeds the arithmetic mean return.C.is approximately equal to the arithmetic mean return minus one-half of the standard deviation.D.is approximately equal to the arithmetic mean return plus one-half of the variance.E.is less than the arithmetic mean return.

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45.You have owned a stock for seven years. The geometric average return on this investment forthose seven years is positive even though the annual rates of return havevaried significantly.Given this, you know the arithmetic average return for the period is:A.positive but less than the geometric average return.B.less than the geometric return and could be negative, zero, or positive.C.equal to thegeometric average return.D.either equal to or greater than the geometric average return.E.greater than the geometric average return.46.The geometric return on an investment is approximately equal to the arithmetic return:A.plushalf the standard deviation.B.plus half the variance.C.minus half the standard deviation.D.minus half the variance.E.divided by two.47.Blume's formula is used to:A.predict future rates of return.B.convert anarithmetic average return into a geometric average return.C.convert a geometric average return into an arithmetic average return.D.measure past performance in a consistent manner.E.compute the historical mean return over amulti-year period of time.48.One year ago, you purchased 100 shares of Southern Foods common stock for $41.60 a share.Today, you sold your shares for $39.70 a share. During this past year, the stock paid $1.40 individends per share. What is your dividend yield on this investment?A.3.30 percentB.3.37 percentC.3.44 percentD.3.53 percentE.3.61 percent

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49.You purchased a stock for $29.40 a share, received a dividend of $0.72 per share, and sold thestock after oneyear for $31.30 a share. What was your dividend yield on this investment?A.2.30 percentB.2.38 percentC.2.45 percentD.2.67 percentE.2.80 percent50.One year ago, you purchased 300 shares of stock at a cost of $7,660. Thestock paid an annualdividend of $1.10 per share. Today, you sold those shares for $28.20 each. What is the capitalgains yield on this investment?A.9.96 percentB.10.44 percentC.12.48 percentD.13.33 percentE.14.75 percent51.Today, you sold 800 shares of Sky High, Inc., for $57.60 a share. You bought the shares one yearago at a price of $61.20 a share. Over the year, you received a total of $500 in dividends. What isyour capital gains yield on this investment?A.-6. 03 percentB.-5.88 percentC.-4.86 percentD.6.25 percentE.7.34 percent52.One year ago, you purchased 400 shares of Southern Cotton at $38.40 a share. During the pastyear, you received a total of $480 in dividends. Today,you sold your shares for $42.10 a share.What is your total return on this investment?A.8.79 percentB.9.64 percentC.10.98 percentD.11.64 percentE.12.76 percent

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53.You purchased a stock for $46.70 a share and resold itone year later. Your total return for theyear was 11.2 percent and the dividend yield was 2.8 percent. At what price did you resell thestock?A.$42.78B.$50.62C.$51.93D.$52.08E.$57.5454.A stock sold for $30 at thebeginning of the year. The end of year stock price was $31.20. What isthe amount of the annual dividend if the total return for the year was 7.7 percent?A.$1.11B.$1.38C.$1.60D.$1.95E.$2.3155.Todd purchased 600shares of stock at a price of $68.20 a share and received a dividend of$1.42 per share. After six months, he resold the stock for $71.30 a share. What was his totaldollar return?A.$1,008B.$1,860C.$2,712D.$3,211E.$3,40056.Christine owns a stock that dropped in price from $42.40 to $38.20 over the past year. Thedividend yield on that stock is 1.4 percent. What is her total return on this investment for theyear?A.-11.31 percentB.-10.99 percentC.-9.91 percentD.-9.59 percentE.-8.51 percent

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57.You have been researching a company and have estimated that the firm's stock will sell for $44 ashare one year from now. You also estimate the stock will have a dividend yield of 2.18 percent.Howmuch are you willing to pay per share today to purchase this stock if you desire a total returnof 15 percent on your investment?A.$37.55B.$38.00C.$38.24D.$39.00E.$40.2058.Shane purchased a stock this morning at a costof $11 a share. He expects to receive an annualdividend of $.27 a share next year. What will the price of the stock have to be one year from todayif Shane is to earn a 17 percent rate of return on this investment?A.$12.51B.$12.60C.$12.88D.$13.14E.$14.2859.Elise just sold a stock and realized a 6.2 percent return for a 4-month holding period. What washer annualized rate of return?A.11.98 percentB.14.78 percentC.19.78 percentD.21.29percentE.27.20 percent60.You purchased a stock five months ago for $40 a share. Today, you sold that stock for $45 ashare. The stock pays no dividends. What was your annualized rate of return?A.26.93 percentB.28.77 percentC.29.32 percentD.30.03 percentE.32.67 percent

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61.Eight months ago, you purchased 300 shares of a non-dividend paying stock for $27 a share.Today, you sold those shares for $31.59 a share. What was your annualized rate of return on thisinvestment?A.17.00 percentB.21.45 percentC.25.50 percentD.26.55 percentE.28.00 percent62.Jason owned a stock for three months and earned an annualized rate of return of 9.82 percent.What was the holding periodreturn?A.2.37 percentB.2.41 percentC.2.46 percentD.2.67 percentE.2.72 percent63.Scott purchased 200 shares of Frozen Foods stock for $48 a share. Four months later, hereceived a dividend of $0.22 a share and also soldthe shares for $42 each. What was hisannualized rate of return on this investment?A.-44.69 percentB.-40.14 percentC.-33.00 percentD.-31.95 percentE.-28.07 percent64.A stock has an average historical risk premium of 9.1percent. The expected risk-free rate for nextyear is 2.6 percent. What is the expected rate of return on this stock for next year?A.6.50 percentB.8.86 percentC.9.10 percentD.9.34 percentE.11.70 percent

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