Last year, T-bills returned 2 percent while your investment in large-company stocksearned an average of 5 percent. Which one of the following terms refers to the difference betweenthese two rates of return?a. risk premiumb. geometric returnc. arithmeticd. standard deviatione. variance a. risk premium
Which one of the following best defines the variance of an investment’s annual returnsover a number of years?a. The average squared difference between the arithmetic and the geometricaverage annual returns.b. The squared summation of the differences between the actual returns andthe average geometric return.c. The average difference between the annual returns and the average returnfor the period.d. The difference between the arithmetic average and the geometric averagereturn for the period.e. The average squared difference between the actual returns and the arithmetic average return. e.The average squared difference between the actual returns and thearithmetic average return.
Standard deviation is a measure of which one of the following?a. average rate of returnb. volatilityc. probabilityd. risk premiume. real returns b. volatility
ch one of the following is defined by its mean and its standard deviation?a. arithmetic nominal returnb. geometric real returnc. normal distributiond. variancee. risk premium c. normal distribution
The average compound return earned per year over a multi-year period is called the_____ average return.a. arithmeticb. standardc. variantd. geometrice. real d. geometric
The return earned in an average year over a multi-year period is called the _____average return.a. arithmeticb. standardc. variantd. geometrice. real a. arithmetic
Assume that the market prices of the securities that trade in a particular market fairlyreflect the available information related to those securities. Which one of the following terms bestdefines that market?a. riskless marketb. evenly distributed marketc. zero volatility marketd. Blume’s markete. efficient capital market e. efficient capital market
Which one of the following statements best defines the efficient market hypothesis?a. Efficient markets limit competition.b. Security prices in efficient markets remain steady as new information becomes available.c. Mispriced securities are common in efficient markets.d. All securities in an efficient market are zero net present value investments.e. Profits are removed as a market incentive when markets become efficient. d. All securities in an efficient market are zero net present value investments.
Stacy purchased a stock last year and sold it today for $3 a share more than herpurchase price. She received a total of $0.75 in dividends. Which one of the following statements iscorrect in relation to this investment?a. The dividend yield is expressed as a percentage of the selling price.b. The capital gain would have been less had Stacy not received thedividends.c. The total dollar return per share is $3.d. The capital gains yield is positive.e. The dividend yield is greater than the capital gains yield. d. The capital gains yield is positive
Which one of the following correctly describes the dividend yield?a. next year’s annual dividend divided by today’s stock priceb. this year’s annual dividend divided by today’s stock pricec. this year’s annual dividend divided by next year’s expected stock priced. next year’s annual dividend divided by this year’s annual dividende. the increase in next year’s dividend over this year’s dividend divided by this year’s dividend a. next year’s annual dividend divided by today’s stock price
Bayside Marina just announced it is decreasing its annual dividend from $1.64 per shareto $1.50 per share effective immediately. If the dividend yield remains at its pre-announcementlevel, then you know the stock price:a. was unaffected by the announcement.b. increased proportionately with the dividend decrease.c. decreased proportionately with the dividend decrease.d. decreased by $0.14 per share.e. increased by $0.14 per share. c. decreased proportionately with the dividend decrease.
Which one of the following statements related to capital gains is correct?a. The capital gains yield includes only realized capital gains.b. An increase in an unrealized capital gain will increase the capital gains yield.c. The capital gains yield must be either positive or equal to zero.d. The capital gains yield is expressed as a percentage of the sales price.e. The capital gains yield represents the total return earned by an investor. b. An increase in an unrealized capital gain will increase the capital gainsyield.
Which of the following statements is correct in relation to a stock investment?I. The capital gains yield can be positive, negative, or zero.II. The dividend yield can be positive, negative, or zero.III. The total return can be positive, negative, or zero.IV. Neither the dividend yield nor the total return can be negative. I and III only
The real rate of return on a stock is approximately equal to the nominal rate of return:a. multiplied by (1 + inflation rate).b. plus the inflation rate.c. minus the inflation rate.d. divided by (1 + inflation rate).e. divided by (1− inflation rate). c. minus the inflation rate.
As long as the inflation rate is positive, the real rate of return on a security will be ____the nominal rate of return.a. greater thanb. equal toc. less thand. greater than or equal toe. unrelated to c. less than
Small-company stocks, as the term is used in the textbook, are best defined as the:a. 500 newest corporations in the U.S.b. firms whose stock trades OTC.c. smallest twenty percent of the firms listed on the NYSE.d. smallest twenty-five percent of the firms listed on NASDAQ.e. firms whose stock is listed on NASDAQ. c. smallest twenty percent of the firms listed on the NYSE.
Which one of the following statements is a correct reflection of the U.S. markets for theperiod 1926-2007?a. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period.b. U.S. Treasury bills provided a positive rate of return each and every year during the period.c. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period.d. Long-term government bonds outperformed U.S. Treasury bills every year during the period.e. National deflation occurred at least once every decade during the period. b. U.S. Treasury bills provided a positive rate of return each and every year during the period.
Which one of the following categories of securities had the highest average return for theperiod 1926-2007?a. U.S. Treasury billsb. large company stocksc. small company stocksd. long-term corporate bondse. long-term government bonds c. small company stocks
Which one of the following categories of securities had the lowest average risk premiumfor the period 1926-2007?a. long-term government bondsb. small company stocksc. large company stocksd. long-term corporate bondse. U.S. Treasury bills e. U.S. treasury bills
Which one of the following categories of securities has had the most volatile returns overthe period 1926-2007?a. long-term corporate bondsb. large-company stocksc. intermediate-term government bondsd. U.S. Treasury billse. small-company stocks e. small company stocks
Which one of the following statements correctly applies to the period 1926-2007?a. Large-company stocks earned a higher average risk premium than did small-company stocks.b. Intermediate-term government bonds had a higher average return than longtermcorporate bonds.c. Large-company stocks had an average annual return of 14.7 percent.d. Inflation averaged 2.6 percent for the period.e. U.S. Treasury bills had a positive average real rate of return. e. U.S. Treasury bills had a positive average real rate of return.
Which one of the following time periods is associated with high rates of inflation?aa. 1929-1933b. 1957-1961c. 1978-1981d. 1992-1996e. 2001-2005 c. 1978-1981
Which one of the following statements concerning U.S. Treasury bills is correct for theperiod 1926-2007?a. The annual rate of return always exceeded the annual inflation rate.b. The average risk premium was 0.7 percent.c. The annual rate of return was always positive.d. The average excess return was 1.1 percent.e. The average real rate of return was zero. c. The annual rate of return was always positive.
Which one of the following is a correct ranking of securities based on their volatility overthe period of 1926-2007? Rank from highest to lowest.a. large company stocks, U.S. Treasury bills, long-term government bondsb. small company stocks, long-term corporate bonds, large company stocksc. small company stocks, long-term corporate bonds, intermediate-termgovernment bondsd. large company stocks, small company stocks, long-term government bondse. intermediate-term government bonds, long-term corporate bonds, U.S.Treasury bills c. small company stocks, long-term corporate bonds, intermediate-termgovernment bonds
What was the highest annual rate of inflation during the period 1926-2007?a. between 0 and 3 percentb. between 3 and 5 percentc. between 5 and 10 percentd. between 10 and 15 percente. between 15 and 20 percent d. between 10 and 15 percent
The excess return is computed as the: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. the risk-free rate plus the inflation rate.e. risk-free rate minus the inflation rate. b. return on a risky security minus the risk-free rate.
Which one of the following earned the highest risk premium over the period 1926-2007?a. long-term corporate bondsb. U.S. Treasury billsc. small-company stocksd. large-company stockse.long-term government bonds c. small-company stocks
Which one of the following was the least volatile over the period of 1926-2007?a. large-company stocksb. inflationc. long-term corporate bondsd. U.S. Treasury billse. intermediate-term government bonds d. US treasury bills
Which one of the following statements is correct?a. The greater the volatility of returns, the greater the risk premium.b. The lower the volatility of returns, the greater the risk premium.c. The lower the average return, the greater the risk premium.d. The risk premium is unrelated to the average rate of return.e. The risk premium is not affected by the volatility of returns. a. The greater the volatility of returns, the greater the risk premium.
Which of the following correspond to a wide frequency distribution?I. relatively low riskII. relatively low rate of returnIII. relatively high standard deviationIV. relatively large risk premium III and IV only
To convince investors to accept greater volatility, you must:a. decrease the risk premium.b. increase the risk premium.c. decrease the real return.d. decrease the risk-free rate.e. increase the risk-free rate. b. increase the risk premium
If the variability of the returns on large-company stocks were to increase over the longterm,you would expect which of the following to occur as a result?I. decrease in the average rate of returnII. increase in the risk premiumIII. increase in the 68 percent probability range of the frequency distribution of returnsIV. decrease in the standard deviation II and III only
Which one of the following statements is correct based on the historical record for theperiod 1926-2007?a. The standard deviation of returns for small-company stocks was double that oflarge-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 underperformed intermediate-term governmentbonds. c. Long-term government bonds had a lower return but a higher standarddeviation on average than did long-term corporate bonds.
What is the probability that small-company stocks will produce an annual return that ismore than one standard deviation below the average?a. 1.0 percentb. 2.5 percentc. 5.0 percentd. 16 percente. 32 percent d. 16 percent
The primary purpose of Blume’s formula is to:a. compute an accurate historical rate of return.b. determine a stock’s true current value.c. consider compounding when estimating a rate of return.d. determine the actual real rate of return.e.project future rates of return. e. project future rates of return
Which two of the following are the most likely reasons why a stock price might not reactat all on the day that new information related to the stock issuer is released?I. insiders knew the information prior to the announcementII. investors need time to digest the information prior to reactingIII. the information has no bearing on the value of the firmIV. the information was anticipated III and IV only
Which one of the following is most indicative of a totally efficient stock market?a. extraordinary returns earned on a routine basisb. positive net present values on stock investments over the long-termc. zero net present values for all stock investmentsd. arbitrage opportunities which develop on a routine basise. realizing negative returns on a routine basis c. zero net present values for all stock investments
Which one of the following statements is correct concerning market efficiency?a. Real asset markets are more efficient than financial markets.b. If a market is efficient, arbitrage opportunities should be common.c. In an efficient market, some market participants will have an advantage over others.d. A firm will generally receive a fair price when it issues new shares of stock.e. New information will gradually be reflected in a stock’s price to avoid any sudden change in the price of the stock. d. A firm will generally receive a fair price when it issues new shares of stock.
Efficient financial markets fluctuate continuously because: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. b. the markets are continually reacting to new information.
Inside information has the least value when financial markets are:a. weak form efficient.b. semiweak form efficient.c. semistrong form efficient.d. strong form efficient.e. inefficient. d. strong form efficient
According to theory, studying historical stock price movements to identify mispricedstocks:a. is effective as long as the market is only semistrong form efficient.b. is effective provided the market is only weak form efficient.c. is ineffective even when the market is only weak form efficient.d. becomes ineffective as soon as the market gains semistrong form efficiency.e. is ineffective only in strong form efficient markets. c. is ineffective even when the market is only weak form efficient.
Which of the following statements related to market efficiency tend to be supported bycurrent evidence?I. Markets tend to respond quickly to new information.II. It is difficult for investors to earn abnormal returns.III. Short-run prices are difficult to predict accurately based on public information.IV. Markets are most likely weak form efficient. I, II and III only
If you excel in analyzing the future outlook of firms, you would prefer the financialmarkets be ____ form efficient so that you can have an advantage in the marketplace.a. weakb. semiweakc. semistrongd. stronge. perfect a. weak
You are aware that your neighbor trades stocks based on confidential information heoverhears at his workplace. This information is not available to the general public. This neighborcontinually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.a. weakb. semiweakc. semistrongd. stronge. perfect c. semistrong
The U.S. Securities and Exchange Commission periodically charges individuals withinsider trading and claims those individuals have made unfair profits. Given this, you would bemost apt to argue that the markets are less than _____ form efficient.a. weakb. semiweakc. semistrongd. stronge. perfect d. strong
Individuals who continually monitor the financial markets seeking mispriced securities:a. earn excess profits over the long-term.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 theirbasis of evaluation. b. make the markets increasingly more efficient.

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