Question 1

Suppose the quarterly arithmetic average return for a stock is 5% per quarter and the stock gives a return of 10% each over the next two quarters.The arithmetic average return over the six quarters is:

Accepted Answer

A)  9% 
B)  6.67% 
C)  7.5% 
D)  10% 
E)  12%

Question 2

You own shares in Yahoo that were purchased at a price of $21 per share.Microsoft has offered to purchase Yahoo and buy your shares at a price of $31 per share.What will be your return if you tender your shares to Microsoft and the deal is completed?

Accepted Answer

A)  47.62% 
B)  33.45% 
C)  49.65% 
D)  43.34% 
E)  37.71%

Question 3

Which of the following is a systematic risk?

Accepted Answer

A)  the risk that oil prices rise, increasing production costs 
B)  the risk that the CEO is killed in a plane crash 
C)  the risk of a key employee being hired away by a competitor 
D)  the risk of a product liability lawsuit 
E)  the risk of an equipment failure

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

If the returns on a stock index can be characterized by a normal distribution with mean 12%,the probability that returns will be lower than 12% over the next period equals:

Accepted Answer

A)  50% 
B)  25% 
C)  46% 
D)  33% 
E)  70%

Question 6

Which type of investment has historically had the highest volatility?

Accepted Answer

The answer of Which type of investment has historically had...

Question 7

Investors should earn a risk premium for bearing unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 8

The average annual return over the period 1886-2006 for stocks that comprise the S&P 500 is 10%,and the standard deviation of returns is 20%.Based on these numbers,what is a 95% confidence interval for 2007 returns?

Accepted Answer

A)  -15%,25% 
B)  -20%,40% 
C)  -30%, 50% 
D)  -30%,40% 
E)  -10%, 30%

Question 9

Risk that is linked across outcomes is called

Accepted Answer

A)  diversifiable risk. 
B)  common risk. 
C)  uncorrelated risk. 
D)  independent risk. 
E)  systematic risk.

Question 10

Use the table for the question(s) below.
Consider the following price and dividend data for Ford Motor Company:
 
-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 capital gains rate (yield)for this period is closest to:

Accepted Answer

A)  0.70% 
B)  0.75% 
C)  -8.80% 
D)  -8.15% 
E)  1.25%

Question 11

How does diversification affect systematic and unsystematic risk?

Accepted Answer

The answer of How does diversification affect systematic and unsystematic...

Question 12

Which of the following is a diversifiable risk?

Accepted Answer

A)  the risk that oil prices rise, increasing production costs 
B)  the risk that the economy slows, reducing demand for your firm's products 
C)  the risk that your new product will not receive regulatory approval 
D)  the risk that the Bank of Canada raises interest rates 
E)  the risk that a new government is elected and raises corporate taxes

Question 13

Suppose you invested $98 in the Ishares High Yield Fund (HYG)a month ago.It paid a dividend of $0.47 today and then you sold it for $99.What was your dividend yield and capital gains yield on the investment?

Accepted Answer

A)  0.45%, 1.09% 
B)  0.48%, 1.02% 
C)  0.48%, 1.08% 
D)  1.02%, 1.12% 
E)  0.75%, 0.98%

Question 14

The S&P TSX Composite index delivered a return of 14.48%,24.13%,17.26% and 9.83% over four successive years.What is the arithmetic average annual return per year?

Accepted Answer

A)  16.43% 
B)  20.8% 
C)  14.48% 
D)  18.54% 
E)  15.96%

Question 15

Which of the following investments offered the highest overall return over the past fifty years?

Accepted Answer

A)  Treasury bills 
B)  S&P 500 
C)  S&P/TSX Composite Index 
D)  corporate bonds 
E)  long-term Government of Canada bonds

Question 16

The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.If you invested $10,000 in the index at the beginning of 2010,what amount would your investment have been worth at the end of 2013?

Accepted Answer

A)  $13,256 
B)  $13,005 
C)  $12,908 
D)  $12.974 
E)  $14.388

Question 17

Your investment over one year had a realized return of 7% and a dividend of $1.25.If the sale price was $36 per share,what was the cost of the investment?

Accepted Answer

A)  $32.15 
B)  $32.78 
C)  $33.64 
D)  $34.81 
E)  $34.90

Question 18

The risk premium is the difference between the average return on a security and the average return for

Accepted Answer

A)  long-term Government of Canada bonds. 
B)  a portfolio of securities with similar risk. 
C)  a broad-based market portfolio like the S&P 500 index. 
D)  Treasury bills. 
E)  corporate bonds.

Question 19

Suppose you invested $7.55 in Big Rock Brewery one month ago.Today,it paid a dividend of $0.10,and then you sold it for $7.35.What was the return on your investment?

Accepted Answer

A)  1% 
B)  -1% 
C)  -1.3% 
D)  4.2% 
E)  1.1%

Question 20

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

Accepted Answer

A)  higher, higher 
B)  higher, lower 
C)  lower, higher 
D)  lower, lower 
E)  higher, similar

Exam 10: Risk and Return in Capital Markets