SOLUTIONS
TRAINING SESSION 2 - 16 MULTIPLE CHOICE QUESTIONS. Choose the one alternative that
best completes the statement or answers the question.
1) Suppose an investment is equally likely to have a 35% return or a -20% return.
The standard deviation on the return for this investment is closest to:
A) 38.9% B) 19.4% C) 0% D) 27.5%
Topic: 10.2 Common Measures of Risk and Return
Answer: D
E[R] = R PR R = .50(35%) + .50(-20%) = 7.5%
Var(R) = R PR (R E R )2 = .50(.35 - .075)2 + .50(-.20 - .075)2 = .07563
Sdev = .07563(1/2) = .2750
2) Which of the following statements is false?
A) We measure the degree of estimation error statistically through the
standard error of the estimate.
B) When focusing on the returns of a single security, its common practice to
assume that all dividends are immediately invested at the risk-free rate.
C) We estimate the variance by computing the average squared deviation
from the average realized return.
D) We estimate the standard deviation or volatility as the square root of the
variance.
Topic: 10.3 Historical Returns of Stocks and Bonds
Answer: B
When focusing on the returns of a single security, its common practice to
assume that all dividends are immediately re-invested and used to purchase
additional shares of the same stock or security.
, Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
Date Price ($) Dividend ($)
December 31, 2004 $14.64
January 26, 2005 $13.35 $0.10
April 28, 2005 $9.14 $0.10
July 29, 2005 $10.74 $0.10
October 28, 2005 $8.02 $0.10
December 30, 2005 $7.72
3) Assume that you purchased Ford Motor Company stock at the closing price on
December 31, 2004 and sold it after the dividend had been paid at the closing
price on January 26, 2005. Your dividend yield for this period is closest to:
A) 5.1% B) 7.3% C) 0.68% D) 4.5%
Topic: 10.3 Historical Returns of Stocks and Bonds
Answer: C
D iv t 1 0 .1
D i v id e n d Y i e ld 0 .0 0 6 8 0 .6 8 %
Pt 1 4 .6 4
4) Using the same table as in question 3), now assume that you purchased Ford
Motor Company stock at the closing price on December 31, 2004 and sold it at
the closing price on December 30, 2005. Your realized annual return for the
year 2005 is closest to:
A) -45.1% B) -47.3% C) -48.5% D) -44.5%
Topic: 10.3 Historical Returns of Stocks and Bonds
Answer: A
Divt 1 Pt 1 Divt 1 Pt 1 Pt
Rt 1 1
Pt Pt Pt
Dividend Yield Capital Gain Rate
1 Rannual (1 RQ1 )(1 RQ2 )(1 RQ3 )(1 RQ4 )
Date Price ($) Dividend ($) Return (1 + return)
December 31, 2004 $14.64 1
January 26, 2005 $13.35 $0.10 -8.13% 0.918716
April 28, 2005 $9.14 $0.10 -30.79% 0.692135
July 29, 2005 $10.74 $0.10 18.60% 1.185996
October 28, 2005 $8.02 $0.10 -24.39% 0.756052
December 30, 2005 $7.72 -3.74% 0.962594
The Product of
(1 + returns) - 1 = -0.45116
TRAINING SESSION 2 - 16 MULTIPLE CHOICE QUESTIONS. Choose the one alternative that
best completes the statement or answers the question.
1) Suppose an investment is equally likely to have a 35% return or a -20% return.
The standard deviation on the return for this investment is closest to:
A) 38.9% B) 19.4% C) 0% D) 27.5%
Topic: 10.2 Common Measures of Risk and Return
Answer: D
E[R] = R PR R = .50(35%) + .50(-20%) = 7.5%
Var(R) = R PR (R E R )2 = .50(.35 - .075)2 + .50(-.20 - .075)2 = .07563
Sdev = .07563(1/2) = .2750
2) Which of the following statements is false?
A) We measure the degree of estimation error statistically through the
standard error of the estimate.
B) When focusing on the returns of a single security, its common practice to
assume that all dividends are immediately invested at the risk-free rate.
C) We estimate the variance by computing the average squared deviation
from the average realized return.
D) We estimate the standard deviation or volatility as the square root of the
variance.
Topic: 10.3 Historical Returns of Stocks and Bonds
Answer: B
When focusing on the returns of a single security, its common practice to
assume that all dividends are immediately re-invested and used to purchase
additional shares of the same stock or security.
, Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
Date Price ($) Dividend ($)
December 31, 2004 $14.64
January 26, 2005 $13.35 $0.10
April 28, 2005 $9.14 $0.10
July 29, 2005 $10.74 $0.10
October 28, 2005 $8.02 $0.10
December 30, 2005 $7.72
3) Assume that you purchased Ford Motor Company stock at the closing price on
December 31, 2004 and sold it after the dividend had been paid at the closing
price on January 26, 2005. Your dividend yield for this period is closest to:
A) 5.1% B) 7.3% C) 0.68% D) 4.5%
Topic: 10.3 Historical Returns of Stocks and Bonds
Answer: C
D iv t 1 0 .1
D i v id e n d Y i e ld 0 .0 0 6 8 0 .6 8 %
Pt 1 4 .6 4
4) Using the same table as in question 3), now assume that you purchased Ford
Motor Company stock at the closing price on December 31, 2004 and sold it at
the closing price on December 30, 2005. Your realized annual return for the
year 2005 is closest to:
A) -45.1% B) -47.3% C) -48.5% D) -44.5%
Topic: 10.3 Historical Returns of Stocks and Bonds
Answer: A
Divt 1 Pt 1 Divt 1 Pt 1 Pt
Rt 1 1
Pt Pt Pt
Dividend Yield Capital Gain Rate
1 Rannual (1 RQ1 )(1 RQ2 )(1 RQ3 )(1 RQ4 )
Date Price ($) Dividend ($) Return (1 + return)
December 31, 2004 $14.64 1
January 26, 2005 $13.35 $0.10 -8.13% 0.918716
April 28, 2005 $9.14 $0.10 -30.79% 0.692135
July 29, 2005 $10.74 $0.10 18.60% 1.185996
October 28, 2005 $8.02 $0.10 -24.39% 0.756052
December 30, 2005 $7.72 -3.74% 0.962594
The Product of
(1 + returns) - 1 = -0.45116
