Question 1

The excess return is computed as the:

Accepted Answer

A)   return on a security minus the inflation rate.
B)   return on a risky security minus the risk-free rate.
C)   risk premium on a risky security minus the risk-free rate.
D)   risk-free rate plus the inflation rate.
E)   risk-free rate minus the inflation rate.F) C) and D)
G) None of the above

Question 2

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ________ form efficient.

Accepted Answer

A)   weak
B)   semiweak
C)   semistrong
D)   strong
E)   perfectF) All of the above
G) C) and D)

Question 3

Six months ago, you purchased 300 shares of stock in Global Trading at a price of $26.19 a share. The stock pays a quarterly dividend of $.12 a share. Today, you sold all of your shares for $27.11 per share. What is the total amount of your dividend income on this investment?

Accepted Answer

A)   $36
B)   $72
C)   $348
D)   $144
E)   $204F) B) and C)
G) None of the above

Question 4

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Accepted Answer

A)   Weak
B)   Semiweak
C)   Semistrong
D)   Strong
E)   PerfectF) A) and B)
G) None of the above

Question 5

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 8 percent, −5 percent, 16 percent, 12 percent, and 8 percent. What is the variance of these returns?

Accepted Answer

A)   .07887
B)   .00622
C)   .01725
D)   .01684
E)   .00836F) All of the above
G) A) and B)

Question 6

The average annual return on small-company stocks was about ________ percent greater than the average annual return on large-company stocks over the period 1926-2016.

Accepted Answer

A)   3
B)   5
C)   7
D)   9
E)   11F) B) and E)
G) A) and B)

Question 7

Which of the following yields on a stock can be negative?

Accepted Answer

A)   Dividend yield
B)   Capital gains yield
C)   Capital gains yield and total return
D)   Dividend yield, capital gains yield, and total return
E)   Dividend yield and total returnF) A) and E)
G) None of the above

Question 8

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

Accepted Answer

A)   1.0 percent
B)   2.5 percent
C)   5.0 percent
D)   16 percent
E)   32 percentF) A) and C)
G) A) and B)

Question 9

Efficient financial markets fluctuate continuously because:

Accepted Answer

A)   the markets are continually reacting to old information as that information is absorbed.
B)   the markets are continually reacting to new information.
C)   arbitrage trading is limited.
D)   current trading systems require human intervention.
E)   investments produce varying levels of net present values.F) A) and C)
G) A) and E)

Question 10

Small-company stocks, as the term is used in the textbook, are best defined as the:

Accepted Answer

A)   500 newest corporations in the U.S.
B)   companies whose stock trades OTC.
C)   smallest 20 percent of the companies listed on the NYSE.
D)   smallest 25 percent of the companies listed on NASDAQ.
E)   companies whose stock is listed on NASDAQ.F) A) and B)
G) A) and C)

Question 11

Suppose a stock had an initial price of $76 per share, paid a dividend of $1.42 per share during the year, and had an ending share price of $81. What was the capital gains yield?

Accepted Answer

A)   6.17 percent
B)   6.69 percent
C)   7.05 percent
D)   6.58 percent
E)   5.44 percentF) A) and E)
G) All of the above

Question 12

Which one of the following categories of securities had the highest average annual return for the period 1926-2016?

Accepted Answer

A)   U.S. Treasury bills
B)   Large-company stocks
C)   Small-company stocks
D)   Long-term corporate bonds
E)   Long-term government bondsF) None of the above
G) All of the above

Question 13

A stock had returns of 5 percent, 14 percent, 11 percent, −8 percent, and 6 percent over the past five years. What is the standard deviation of these returns?

Accepted Answer

A)   7.74 percent
B)   8.21 percent
C)   9.68 percent
D)   8.44 percent
E)   7.49 percentF) A) and B)
G) A) and C)

Question 14

Individual investors who continually monitor the financial markets seeking mispriced securities:

Accepted Answer

A)   earn excess profits on all of their investments.
B)   make the markets increasingly more efficient.
C)   are never able to find a security that is temporarily mispriced.
D)   are overwhelmingly successful in earning abnormal profits.
E)   are always quite successful using only historical price information as their basis of evaluation.F) B) and C)
G) B) and D)

Question 15

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year?

Accepted Answer

A)   Less than 2.5 percent but more than .5 percent
B)   More than 16 percent
C)   Less than .5 percent
D)   Less than 1 percent but more than .5 percent
E)   Less than 16 percent but more than 2.5 percentF) A) and B)
G) D) and E)

Question 16

What was the average rate of inflation over the period of 1926-2016?

Accepted Answer

A)   Less than 2.0 percent
B)   Between 2.0 and 2.4 percent
C)   Between 2.4 and 2.8 percent
D)   Between 2.8 and 3.2 percent
E)   Greater than 3.2 percentF) A) and D)
G) A) and E)

Question 17

Which one of the following statements is correct based on the historical record for the period 1926-2016?

Accepted Answer

A)   The standard deviation of returns for small-company stocks was double that of large-company stocks.
B)   U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free.
C)   Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.
D)   Inflation was less volatile than the returns on U.S. Treasury bills.
E)   Long-term government bonds were less volatile than intermediate-term government bonds.F) A) and C)
G) A) and E)

Question 18

You find a certain stock that had returns of 8 percent, −3 percent, 12 percent, and 17 percent for four of the last five years. The average return of the stock for the past five-year period was 6 percent. What is the standard deviation of the stock's returns for the five-year period?

Accepted Answer

A)   10.39 percent
B)   4.98 percent
C)   7.16 percent
D)   9.25 percent
E)   5.38 percentF) D) and E)
G) B) and C)

Question 19

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?

Accepted Answer

A)   0 percent
B)   2.8 percent
C)   .5 percent
D)   1.7 percent
E)   4.3 percentF) C) and D)
G) B) and E)

Question 20

A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

Accepted Answer

A)   −2.4 to 17.5 percent
B)   −2.60 to 11.80 percent
C)   −12.5 to 26.7 percent
D)   −10.4 to 12.3 percent
E)   −10.9 to 25.1 percentF) C) and D)
G) B) and D)

Exam 12: Some Lessons from Capital Market History

A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

Correct AnswerverifiedShow Answer

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Correct AnswerverifiedShow Answer

Six months ago, you purchased 300 shares of stock in Global Trading at a price of $26.19 a share. The stock pays a quarterly dividend of $.12 a share. Today, you sold all of your shares for $27.11 per share. What is the total amount of your dividend income on this investment?

Correct AnswerverifiedShow Answer

Individual investors who continually monitor the financial markets seeking mispriced securities:

Correct AnswerverifiedShow Answer

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?

Correct AnswerverifiedShow Answer

The excess return is computed as the:

Correct AnswerverifiedShow Answer

Efficient financial markets fluctuate continuously because:

Correct AnswerverifiedShow Answer

Which one of the following categories of securities had the highest average annual return for the period 1926-2016?

Correct AnswerverifiedShow Answer

The average annual return on small-company stocks was about ________ percent greater than the average annual return on large-company stocks over the period 1926-2016.

Correct AnswerverifiedShow Answer

Which one of the following statements is correct based on the historical record for the period 1926-2016?

Correct AnswerverifiedShow Answer

You find a certain stock that had returns of 8 percent, −3 percent, 12 percent, and 17 percent for four of the last five years. The average return of the stock for the past five-year period was 6 percent. What is the standard deviation of the stock's returns for the five-year period?

Correct AnswerverifiedShow Answer

Which of the following yields on a stock can be negative?

Correct AnswerverifiedShow Answer

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ________ form efficient.

Correct AnswerverifiedShow Answer

A stock had returns of 5 percent, 14 percent, 11 percent, −8 percent, and 6 percent over the past five years. What is the standard deviation of these returns?

Correct AnswerverifiedShow Answer

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year?

Correct AnswerverifiedShow Answer

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 8 percent, −5 percent, 16 percent, 12 percent, and 8 percent. What is the variance of these returns?

Correct AnswerverifiedShow Answer

Suppose a stock had an initial price of $76 per share, paid a dividend of $1.42 per share during the year, and had an ending share price of $81. What was the capital gains yield?

Correct AnswerverifiedShow Answer

Small-company stocks, as the term is used in the textbook, are best defined as the:

Correct AnswerverifiedShow Answer

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

Correct AnswerverifiedShow Answer

What was the average rate of inflation over the period of 1926-2016?

Correct AnswerverifiedShow Answer

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