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10.3 Historical Returns of Stocks and Bonds

1) Which of the following statements is false?

A) The expected return is the return is the return that actually occurs over a particular time period.

B) If you hold the stock beyond the date of the first dividend, then to compute you return you must specify how you invest any dividends you receive in the interim.

C) The average annual return of an investment during some historical period is simply the average of the realized returns for each year.

D) The realized return is the total return we earn from dividends and capital gains, expressed as a percentage of the initial stock price.

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 standard deviation or volatility as the square root of the variance.

D) We estimate the variance by computing the average squared deviation from the average realized return.

3) Which of the following statements is false?

A) The standard error provides an indication of how far the sample average might deviate from the expected return.

B) The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors.

C) We can use a security's historical average return to estimate its actual expected return.

D) The standard error is the standard deviation of the average return.

4) Which of the following statements is false?

A) The compounded geometric average return is most often used for comparative purposes.

B) We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance.

C) The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns.

D) The geometric average return is a better description of the long-run historical performance of an investment.

5) If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as:

A) Rannual=

B) Rannual= (1 + R1)(1 + R2)(1 + R3)(1 + R4)

C) Rannual= (1 + R1)(1 + R2)(1 + R3)(1 + R4) - 1

D) Rannual= R1 + R2 + R3 + R4

Use the table for the question(s) below.

Consider the following Price and Dividend data for General Electric Company:

Date	Price ($)	Dividend ($)
December 31, 2008	$14.64
January 26, 2009	$13.35	$0.10
April 28, 2009	$9.14	$0.10
July 29, 2009	$10.74	$0.10
October 28, 2009	$8.02	$0.10
December 30, 2009	$7.72

6) Assume that you purchased General Electric Company stock at the closing price on December 31, 2008 and sold it after the dividend had been paid at the closing price on January 26, 2009. Your dividend yield for this period is closest to:

A) -8.15%

B) 0.75%

C) 0.70%

D) -8.80%

7) Assume that you purchased General Electric Company stock at the closing price on December 31, 2008 and sold it after the dividend had been paid at the closing price on January 26, 2009. Your capital gains rate (yield) for this period is closest to:

A) 0.75%

B) 0.70%

C) -8.80%

D) -8.15%

8) Assume that you purchased General Electric Company stock at the closing price on December 31, 2008 and sold it after the dividend had been paid at the closing price on January 26, 2009. Your total return rate (yield) for this period is closest to:

A) 0.75%

B) -8.80%

C) 0.70%

D) -8.15%

9) Assume that you purchased Ford Motor Company stock at the closing price on December 31, 2008 and sold it at the closing price on December 30, 2009. Your realized annual return for the year 2009 is closest to:

A) -45.1%

B) -44.5%

C) -48.5%

D) -47.3%