Exam 11: Risk and Return in Capital Markets

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed?

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to ________.

McCoy paid a one-time special dividend of $3.20 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $62.93. What was your capital gain yield from holding McCoy?

Consider the following price and dividend data for Quicksilver Inc.: Assume that you purchased Quicksilver's 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 ________.

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________.

Which type of investment has historically had the highest volatility?

Is volatility a reasonable measure of risk when evaluating large portfolios?

The risk premium of a stock is NOT affected by its ________.

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________.

The risk that inflation rates are likely to increase in the next year is an example of common risk.

Which of the following statements is FALSE?

Which type of investment has historically had the lowest volatility?

Is volatility a reasonable measure of risk when evaluating the investment in a single stock?

On average, stocks have delivered higher returns than bonds in the long run.

While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return.

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cure's blockbuster drug?

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY)a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment?

Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.