Investment and Portfolio Analysis QUESTIONS AND
ANSWERS (100% Verfied answers)
Which one of the following statements is correct?
A. Large-company stocks are historically riskier than small-company stocks.
B. A risky asset will always have a higher annual rate of return than a riskless asset.
C. There is an indirect relationship between risk and return.
D. The standard deviation is a means of measuring the volatility of returns on an
investment.
E. The standard deviation of the returns on Treasury bills is zero. -ANSWER- D. The
standard deviation is a means of measuring the volatility of returns on an investment.
A stock has an average arithmetic return of 10.55 percent and an average geometric
return of 10.41 percent based on the annual returns for the last 15 years. What is
projected average annual return on this stock for the next 10 years?
A. 10.46 percent
B. 10.17 percent
C. 10.79 percent
D. 10.21 percent
E. 10.38 percent -ANSWER- A. 10.46 percent
Projected return = {[(10 - 1) / (15 - 1)] × 0.1041} + {[(15 - 10) / (15 - 1)] × 0.1055} =
10.46 percent
R(T ) = (T-1/N-1) x Geometric average + (N-T/N-1) x Arithmetic average
You bought 400 shares of Metallica Heavy Metal, Inc., at $30 per share. Over the year,
you received $.75 per share in dividends. If the stock sold for $33 at the end of the year,
what was your dollar return? Your percentage return? -ANSWER- Your dollar return
is just your gain or loss in dollars. Here, we receive $.75 in dividends on each of our 400
shares, for a total of $300. In addition, each share rose from $30 to $33, so we make $3
x 400 shares = $1,200. Our total dollar return is thus $300 + $1,200 = $1,500.
Our percentage return (or just "return" for short) is equal to the $1,500 we made divided
by our initial outlay of $30 x 400 shares = $12,000; so $1,500/12,000 = .125 = 12.5%.
Equivalently, we could have just noted that each share paid a $.75 dividend and each
share gained $3, so the total dollar gain per share was $3.75. As a percentage of the
cost of one share ($30), we get $3.75/30 = .125 = 12.5%.
(Forecasting Returns) Over a 30-year period an asset had an arithmetic return of 12.8
percent and a geometric return of 10.7 percent. Using Blume's formula, what is your
best estimate of the future annual returns over the next 5 years? 10 years? 20 years?
-ANSWER- R(5) = [(5-1/29) x 10.7%] + [(30-5/29) x 12.8%] = 12.51%
,R(10) = 12.15%
R(20) = 11.42%
You plan to buy a common stock and hold it for one year. You expect to receive both
$1.50 from dividends and $26 from the sale of the stock at the end of the year. If you
wanted to earn a 15 percent rate of return, what is the maximum price you would pay for
the stock today?
a. $22.61
b. $23.91
c. $24.50
d. $27.50 -ANSWER- b. $23.91
Percentage returns = [(final price - initial price) + dividend per share] / Initial price
0.15 = [(26 - initial price) + 1.15] / initial price
A portfolio of non-dividend-paying stocks earned a geometric mean return of5 percent
between January 1, 1994, and December 31, 2000. The arithmetic mean return for the
same period was 6 percent. If the market value of the portfolio at the beginning of 1994
was $100,000, the market value of the portfolio at the end of 2000 was closest to:
a. $135,000
b. $140,710
c. $142,000
d. $150,363 -ANSWER- b. $140,710
Which of the following statements about standard deviation is true?
A. Is the square of the variance.
B. Can be a positive or negative number.
C. Is denominated in the same units as the original data.
D. Is the arithmetic mean of the squared deviations from the mean. -ANSWER- C. Is
denominated in the same units as the original data.
(also A but the book says C is the answer)
An investment strategy has an expected return of 12 percent and a standard deviation
of 10 percent. If the investment returns are normally distributed, the probability of
earning a return less than 2 percent is closest to:
A. 10 percent
B. 16 percent
C. 32 percent
D. 34 percent -ANSWER- B. 16 percent
Given a data series that is normally distributed with a mean of 100 and a standard
deviation of 10, about 95 percent of the numbers in the series will fall within which of the
following ranges?
, A. 60 to 140
B. 70 to 130
C. 80 to 120
D. 90 to 110 -ANSWER- C. 80 to 120
Stocks, bonds, options, and futures are the four major types of
a. Debt
b. Real assets
c. Equity
d. Financial assets -ANSWER- d. Financial assets
Suppose the value of an investment doubles in a one-year period. In this case, the rate
of return on this investment over that one-year period is what amount?
A. 100 percent even if the gain is not actually realized.
B. 200 percent even if the gain is not actually realized.
C. 100 percent only if the gain is actually realized.
D. 200 percent only if the gain is actually realized. -ANSWER- A. 100 percent even if
the gain is not actually realized.
Which of the following asset categories has an annual returns history most closely
linked to historical annual rates of inflation?
A. U.S. Treasury bills
B. Corporate bonds
C. Large-company stocks
D. Small-company stocks -ANSWER- A. U.S. Treasury bills
Based on the annual returns history since 1926, which asset category, on average, has
yielded the highest risk premium?
A. U.S. government bonds
B. Corporate bonds
C. Large-company stocks
D. Small-company stocks -ANSWER- D. Small-company stocks
You calculate an average historical return of 20 percent and a standard deviation of
return of 10 percent for an investment in Stonehenge Construction Co. You believe
these values well represent the future distribution of returns. Assuming that returns are
normally distributed, what is the probability that Stonehenge Construction will yield a
negative return?
a. 17 percent
b. 33 percen
c. 5 percent
d. 2.5 percent -ANSWER- d. 2.5 percent
Which of the following statements about a normal distribution is incorrect?
A. A normal distribution is symmetrically centered on its mean.
ANSWERS (100% Verfied answers)
Which one of the following statements is correct?
A. Large-company stocks are historically riskier than small-company stocks.
B. A risky asset will always have a higher annual rate of return than a riskless asset.
C. There is an indirect relationship between risk and return.
D. The standard deviation is a means of measuring the volatility of returns on an
investment.
E. The standard deviation of the returns on Treasury bills is zero. -ANSWER- D. The
standard deviation is a means of measuring the volatility of returns on an investment.
A stock has an average arithmetic return of 10.55 percent and an average geometric
return of 10.41 percent based on the annual returns for the last 15 years. What is
projected average annual return on this stock for the next 10 years?
A. 10.46 percent
B. 10.17 percent
C. 10.79 percent
D. 10.21 percent
E. 10.38 percent -ANSWER- A. 10.46 percent
Projected return = {[(10 - 1) / (15 - 1)] × 0.1041} + {[(15 - 10) / (15 - 1)] × 0.1055} =
10.46 percent
R(T ) = (T-1/N-1) x Geometric average + (N-T/N-1) x Arithmetic average
You bought 400 shares of Metallica Heavy Metal, Inc., at $30 per share. Over the year,
you received $.75 per share in dividends. If the stock sold for $33 at the end of the year,
what was your dollar return? Your percentage return? -ANSWER- Your dollar return
is just your gain or loss in dollars. Here, we receive $.75 in dividends on each of our 400
shares, for a total of $300. In addition, each share rose from $30 to $33, so we make $3
x 400 shares = $1,200. Our total dollar return is thus $300 + $1,200 = $1,500.
Our percentage return (or just "return" for short) is equal to the $1,500 we made divided
by our initial outlay of $30 x 400 shares = $12,000; so $1,500/12,000 = .125 = 12.5%.
Equivalently, we could have just noted that each share paid a $.75 dividend and each
share gained $3, so the total dollar gain per share was $3.75. As a percentage of the
cost of one share ($30), we get $3.75/30 = .125 = 12.5%.
(Forecasting Returns) Over a 30-year period an asset had an arithmetic return of 12.8
percent and a geometric return of 10.7 percent. Using Blume's formula, what is your
best estimate of the future annual returns over the next 5 years? 10 years? 20 years?
-ANSWER- R(5) = [(5-1/29) x 10.7%] + [(30-5/29) x 12.8%] = 12.51%
,R(10) = 12.15%
R(20) = 11.42%
You plan to buy a common stock and hold it for one year. You expect to receive both
$1.50 from dividends and $26 from the sale of the stock at the end of the year. If you
wanted to earn a 15 percent rate of return, what is the maximum price you would pay for
the stock today?
a. $22.61
b. $23.91
c. $24.50
d. $27.50 -ANSWER- b. $23.91
Percentage returns = [(final price - initial price) + dividend per share] / Initial price
0.15 = [(26 - initial price) + 1.15] / initial price
A portfolio of non-dividend-paying stocks earned a geometric mean return of5 percent
between January 1, 1994, and December 31, 2000. The arithmetic mean return for the
same period was 6 percent. If the market value of the portfolio at the beginning of 1994
was $100,000, the market value of the portfolio at the end of 2000 was closest to:
a. $135,000
b. $140,710
c. $142,000
d. $150,363 -ANSWER- b. $140,710
Which of the following statements about standard deviation is true?
A. Is the square of the variance.
B. Can be a positive or negative number.
C. Is denominated in the same units as the original data.
D. Is the arithmetic mean of the squared deviations from the mean. -ANSWER- C. Is
denominated in the same units as the original data.
(also A but the book says C is the answer)
An investment strategy has an expected return of 12 percent and a standard deviation
of 10 percent. If the investment returns are normally distributed, the probability of
earning a return less than 2 percent is closest to:
A. 10 percent
B. 16 percent
C. 32 percent
D. 34 percent -ANSWER- B. 16 percent
Given a data series that is normally distributed with a mean of 100 and a standard
deviation of 10, about 95 percent of the numbers in the series will fall within which of the
following ranges?
, A. 60 to 140
B. 70 to 130
C. 80 to 120
D. 90 to 110 -ANSWER- C. 80 to 120
Stocks, bonds, options, and futures are the four major types of
a. Debt
b. Real assets
c. Equity
d. Financial assets -ANSWER- d. Financial assets
Suppose the value of an investment doubles in a one-year period. In this case, the rate
of return on this investment over that one-year period is what amount?
A. 100 percent even if the gain is not actually realized.
B. 200 percent even if the gain is not actually realized.
C. 100 percent only if the gain is actually realized.
D. 200 percent only if the gain is actually realized. -ANSWER- A. 100 percent even if
the gain is not actually realized.
Which of the following asset categories has an annual returns history most closely
linked to historical annual rates of inflation?
A. U.S. Treasury bills
B. Corporate bonds
C. Large-company stocks
D. Small-company stocks -ANSWER- A. U.S. Treasury bills
Based on the annual returns history since 1926, which asset category, on average, has
yielded the highest risk premium?
A. U.S. government bonds
B. Corporate bonds
C. Large-company stocks
D. Small-company stocks -ANSWER- D. Small-company stocks
You calculate an average historical return of 20 percent and a standard deviation of
return of 10 percent for an investment in Stonehenge Construction Co. You believe
these values well represent the future distribution of returns. Assuming that returns are
normally distributed, what is the probability that Stonehenge Construction will yield a
negative return?
a. 17 percent
b. 33 percen
c. 5 percent
d. 2.5 percent -ANSWER- d. 2.5 percent
Which of the following statements about a normal distribution is incorrect?
A. A normal distribution is symmetrically centered on its mean.
