Practice problems

1- You bought a stock one year ago for $50.28 per share and sold it today for $55.52 per share. It paid a $1.49 per share dividend today. What was your realized return? The realized return was ———–%. (Round to one decimal place.)

2- You bought a stock one year ago for $51.95 per share and sold it today for $56.02 per share. It paid a $1.72 per share dividend today. How much of the return came from dividend yield and how much came from capital gain? The return that came from dividend yield is——– %. (Round to one decimal place.)

capital gain

—-%

3- You bought a stock one year ago for $51.21 per share and sold it today for $56.93 per share. It paid a $1.46 per share dividend today. If you assume that the stock fell $8.97 to $42.24 instead:

a. Is your capital gain different? Why or why not? (Select the best choice below.)

A. The capital gain will not be different because the purchase price did not change.

B. The capital gain will not be different because the selling price is less than the purchase price.

C. The capital gain will be different because the dividend did not change.

D. The capital gain will be different because the selling price has changed.

b. Is your dividend yield different? Why or why not?

Answer :

4- Ten annual returns are listed in the following table:

−19.1%

16.8%

18.3%

−49.5%

43.6%

1.6%

−16.5%

45.9%

45.2%

−3.9%

a. What is the arithmetic average return over the 10-year period?

The arithmetic average return over the 10-year period is——%. (Round to two decimal places.)

b. What is the geometric average return over the 10-year period? ( Round to two decimal places.)
—–%

c. If you invested $100 at the beginning, how much would you have at the end? ( Round to two decimal places.)

5- You observe a portfolio for five years and determine that its average return is 11.7% and the standard deviation of its returns in

19.6%. Would a 30% loss next year be outside the 95% confidence interval for this portfolio?

a. The low end of the 95% prediction interval is ———%. (Enter your response as a percent rounded to one decimal place.)

b. (Select the best choice below.)

A.Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater than −30%.

B.No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater than −30%.

C. No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is less than −30%

D. Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is less than −30%.

6- You are a risk-averse investor who is considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together, and in bad times they all fall together. In the second economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Which economy would you choose to invest in? Explain.

(Select the best choice below.)

A. A risk averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio.

B. A risk averse investor would choose the economy in which stocks move together because the uncertainty is much more predictable, and you have to predict only one thing.

C. A risk averse investor would prefer the economy in which stock returns are independent because by combining the stocks into a portfolio he or she can get a higher expected return than in the economy in which all stocks move together.

D. A risk averse investor is indifferent in both cases because he or she faces unpredictable risk.