Chapter 6 Test Bank Questions

1) The common stock of Plaxo Enterprises had a market price of $10.44 on the day you purchasedit just one year ago. During the past year, the stock paid a dividend of $1.43 and closed at a priceof $11.66. What rate of return did you earn on your investment in Plaxo’s stock? The rate ofreturn you earned on Plaxo’s stock is what percent?2) Syntex is considering an investment in one of two stocks. Given the information that follows,which investment is better, based on the risk (the standard deviation) and return?Common Stock AProbability0.200.600.20Return10%16%21%Common Stock BProbability0.100.400.400.10Return-7%5%13%20%Given the information in the table, what percent is the rate of return for Stock A?3) Caswell Enterprises had the following end-of-year stock prices over the last five years and paidno dividendsTime12345Caswell$9141079a. Calculate the average rate of return for each year from the above information.b. What is the arithmetic average rate of return earned by investing in Caswell’s stockover this period?c. What is the geometric average rate of return earned by investing in Caswell’s stockover this period?d. Considering the beginning and ending stock prices for the five-year period are thesame, which type of average rate of return best describes the annual rate of returnearned over the period (arithmetic or geometric)?e. The annual rate of return at the end of year 2 is what percent?4) On December 5, 2007, the common stock of Google, Inc. (GOOG) was trading at $698.51. Oneyear later, the shares sold for $283.99. Google has never paid a common stock dividend. Whatrate of return would you have earned on your investment had you purchased the shares onDecember 5, 2007? The rate of return you would have earned is what percent?

 

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