QUESTION 11 If a stock rose from $10 to $30 over ten years, the annual rate of r

Question

QUESTION 11 If a stock rose from $10 to $30 over ten years, the annual rate of return a. was 20 percent b. was less than 20 percent c. was greater than 20 percent O d, cannot be determined QUESTION 12 Dollar cost averaging is Oa. periodically investing a specified dollar amount in a stock Ob. a means to insure a positive return Oc. a means to increase the average cost basis d.periodically buying a round lot of stock QUESTION 13 The S&P; 500 uses O. a. a simple average b. a geometric average c. a value-weighted average d. a compound average

Explanation / Answer

11) The stock rose from $10 to $30 over 10 years, i.e., 200% increase. If it increased 20% in first year, then next year it would have increased by a little less because this return would be on the 20% increased price of the previous. Similarly, for year 3 it would be less than year 2. So, on an average, the return would be less than 20%. (option b)

12) Dollar cost averaging means periodically investing a specified dollar amount in a stock (option a)

13) The S&P 500 uses value - weighted average (option c). It uses free-float market capitalisation as weights. So, large companies with big market capitalisation affect the index more than the smaller companies.

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