FIN 5200 AU Small Company Equity and Stock Returns Questions

Chapter 10

#1 A portfolio of small-company common stocks is best described as the stocks of the firms which:

Select one:

a. have gone public within the past five years.

b. are too small to be listed on the NYSE.

c. trade publicly for $5 a share or less.

d. are included in the Samp;P 500 index.

e. represent the smallest twenty percent of the companies listed on the NYSE.

#2 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?

Select one:

a. -22.28 to 20.28%

b. -40.53 to 38.53%

c. –16.10 to 14.10%

d. -24.53 to 22.53%

e. -43.56 to 41.56%

#3 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?

Select one:

a. 5.24%

b. 5.36%

c. 4.81%

d. 4.15%

e. 5.02%

#4 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?

Select one:

a. 4.35%

b. 3.29%

c. 4.08%

d. 3.19%

e. 4.57%

#5 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.

Select one:

a. The firm’s dividend payout ratio has been, is, and will continue to be constant.

b. The firm will continue to pays it dividend on an annual basis.

c. The firm’s rate of growth will be less than previously anticipated.

d. The firm’s ongoing operations are on track to meet prior expectations.

e. The firm is planning a new period of rapid growth.

#6 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?

Select one:

a. 3.35%

b. 2.85%

c. 4.35%

d. 3.75%

e. 2.25%

#7 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?

Select one:

a. $2.10

b. $3.70

c. $3.40

d. $2.50

e. $3.80

#8 The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

Select one:

a. risk premium.

b. time premium.

c. inflation premium.

d. arithmetic average return.

e. geometric average return.

#9 The risk premium is computed by ______ the average return for the investment.

Select one:

a. adding the average return on the U.S. Treasury bill to

b. adding the inflation rate to

c. subtracting the inflation rate from

d. subtracting the average return on the U.S. Treasury bill from

e. subtracting the average return on long-term government bonds from

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

Select one:

a. positive square root of the average return.

b. variance squared.

c. average return divided by N minus one, where N is the number of returns.

d. positive square root of the variance.

e. average squared difference between the actual return and the average return.

#11 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.

Select one:

a. small-company stocks, long-term corporate bonds, large-company stocks

b. long-term corporate bonds, large-company stocks, U.S. Treasury bills

c. large-company stocks, U.S. Treasury bills, long-term government bonds

d. long-term government bonds, long-term corporate bonds, small-company stocks

e. small-company stocks, large-company stocks, long-term corporate bonds

#12 Which one of the following is a correct statement concerning risk premium?

Select one:

a. The lower the average rate of return, the greater the risk premium.

b. The lower the volatility of returns, the greater the risk premium.

c. The greater the volatility of returns, the greater the risk premium.

d. The risk premium is not correlated to the average rate of return.

e. The risk premium is not affected by the volatility of returns.

#13 Which one of the following statements concerning the standard deviation is correct?

Select one:

a. The lower the standard deviation, the less certain the rate of return in any one given year.

b. The standard deviation varies in direct relation to increases in dividend yield.

c. The standard deviation is a measure of total return.

d. The higher the standard deviation, the lower the risk.

e. The standard deviation is a measure of the total risk.

#14 A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What is the portfolio weight of Stock A?

Select one:

a. 67.42%

b. 34.04%

c. 32.58%

d. 29.87%

e. 61.98%

#15 A portfolio consists of three stocks. There are 540 shares of Stock A valued at $24.20 share, 310 shares of Stock B valued at $48.10 a share, and 200 shares of Stock C priced at $26.50 a share. Stocks A, B, and C are expected to return 8.3 percent, 16.4 percent, and 11.7 percent, respectively. What is the expected return on this portfolio?

Select one:

a. 11.67%

b. 12.78%

c. 12.47%

d. 11.87%

e. 12.50%

#16 A portfolio contains two securities and has a beta of 1.08. The first security comprises 54 percent of the portfolio and has a beta of 1.27. What is the beta of the second security?

Select one:

a. .86

b. .82

c. .93

d. .62

e. .79

#17 According to the capital asset pricing model, the expected return on a security is:

Select one:

a. negatively and linearly related to the security’s beta.

b. positively and non-linearly related to the security’s beta.

c. positively and linearly related to the security’s variance.

d. positively and linearly related to the security’s beta.

e. negatively and non-linearly related to the security’s beta.

#18 As we add more diverse securities to a portfolio, the ____ risk of the portfolio will decrease while the _____ risk will not.

Select one:

a. unsystematic; total

b. total; unsystematic

c. systematic; unsystematic

d. total; systematic

e. systematic; total

#19 Correlation is expressed as the symbol:

Select one:

a. є.

b. α.

c. c.

d. β.

e. ρ.

#20 Standard deviation measures _____ risk while beta measures ____ risk.

Select one:

a. total; unsystematic

b. nondiversifiable; diversifiable

c. total; systematic

d. unsystematic; systematic

e. unsystematic; total