Chapter 01
A Brief History of Risk and Return
Multiple Choice Questions
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 by the 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 annual dividend 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.
,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 frequently used as a proxy for 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 risky asset 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. inflated return.
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.
,10. A frequency distribution, which is completely defined by its average (mean) and
standard deviation, is referred 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 per year 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. The average compound return earned per year over a multiyear period when inflows
and outflows are considered is called the:
A. total return.
B. average capital gains yield.
C. dollar-weighted average return.
D. arithmetic average return.
E. geometric average return.
, 14. Which one of the following statements is correct concerning the dividend yield and the
total return?
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 be greater 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.
15. An annualized return:
A. is less than a holding 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 an
investment.
C. is expressed as the capital gains yield that would have been realized if an investment had
been held for a twelve-month period.
D. is computed as (1 + holding period percentage return)m, where m is the number of
holding periods in a year.
E. is computed as (1 + holding period percentage return)m, where m is the number of
months in the holding period.
16. Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before
reselling it. What is the value of "m" when computing the annualized return on this
investment?
A. .25
B. .33
C. .40
D. 3.00
E. 4.00
17. 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 is realized.
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.
A Brief History of Risk and Return
Multiple Choice Questions
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 by the 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 annual dividend 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.
,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 frequently used as a proxy for 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 risky asset 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. inflated return.
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.
,10. A frequency distribution, which is completely defined by its average (mean) and
standard deviation, is referred 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 per year 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. The average compound return earned per year over a multiyear period when inflows
and outflows are considered is called the:
A. total return.
B. average capital gains yield.
C. dollar-weighted average return.
D. arithmetic average return.
E. geometric average return.
, 14. Which one of the following statements is correct concerning the dividend yield and the
total return?
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 be greater 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.
15. An annualized return:
A. is less than a holding 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 an
investment.
C. is expressed as the capital gains yield that would have been realized if an investment had
been held for a twelve-month period.
D. is computed as (1 + holding period percentage return)m, where m is the number of
holding periods in a year.
E. is computed as (1 + holding period percentage return)m, where m is the number of
months in the holding period.
16. Stacey purchased 300 shares of Coulter Industries stock and held it for 4 months before
reselling it. What is the value of "m" when computing the annualized return on this
investment?
A. .25
B. .33
C. .40
D. 3.00
E. 4.00
17. 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 is realized.
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.
