Essentials of Corporate finance CH 10

Which one of the following statements is correct?A The reward for bearing risk is called the standard deviation.B The risk-free rate of return has a risk premium of 1.0.C Risk premiums are inversely related to the standard deviation of returnsD Risks and expected return are inversely related.E The higher the expected rate of return the wider the distribution of returns., E
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?A Probability curveB Normal distributionC Standard deviationD VarianceE Arithmetic average return B
Which one of the following has the narrowest distribution of returns for the period 1926-2014?A Small-company stocksB Long-term government bondsC Long-term corporate bondsD Intermediate-term government bondsE Large-company stocks D
Which one of the following could cause the total return on an investment to be a negative rate?A Constant annual dividend amountB Stock price that declines over the investment periodC Stock price that remains constant over the investment periodD Stock price that increases over the investment periodE Increase in the annual dividend amount B
The variance is the average squared difference between which of the following?A Average return and the standard deviationB Actual return and the risk-free rateC Actual return and average returnD Actual return and the real returnE Actual return and (average return/N – 1) C
Suppose you bought a $1000 face value bond with a 5 percent coupon one year ago for $1,020. The bond sells today for $986. If the inflation rate last year was 2.3 percent, what was your total real rate of return on this investment?A -.71 percentB -.48 percentC .89 percentD .02 percentE .31 percent, A
Which one of the following is the hypothesis that securities markets are efficient?A Efficient markets hypothesisB Standard deviation hypothesisC Geometric market hypothesisD Financial markets hypothesisE Capital market hypothesis A
An efficient capital market is best defined as a market in which security prices reflect which one of the following?A All available informationB Current inflationC The historical arithmetic rate of returnD The historical geometric rate of returnE A risk premium A
Which one of the following is defined as the average compound return earned per year over a multiyear period?A Normal distribution of returnsB Standard deviation of returnsC Variance of returnsD Arithmetic average returnE Geometric average return E
The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.A lower; lowerB higher; lowerC higher; higherD lower; higher A
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the:A returns of the 100 largest firms in the U.S.B stocks of the 500 companies included in the S&P 500 index.C largest 20 percent of the stocks traded on the NYSE.D returns of all the stocks listed on the NYSE.E stock returns for the largest 10 percent of the publicly traded firms in the U.S. B
Which one of the following is the positive square root of the variance?A Real returnB Standard deviationC MeanD Risk-free rateE Average return B
On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?A Risk premiumB Average returnC Inflation premiumD Required returnE Real return A
Assume large-company stocks returned 12.1 percent on average over the past 88 years. The risk premium on these stocks was 8.6 percent and the inflation rate was 3.0 percent. What was the average nominal risk-free rate of return for those 88 years?A 9.1 percentB .5 percentC 6.5 percentD 3.5 percentE 4.6 percent D
One year ago, you purchased a 6 percent coupon bond with a face value of $1,000 when it was selling for 98.6 percent of par. Today, you sold this bond for 101.2 percent of par. What is your total dollar return on this investment?A $64B $82C $74D $60E $86 E
Which one of the following best describes an arithmetic average return?A Return earned in an average year over a multiyear periodB Total return divided by N – 1, where N equals the number of individual returnsC Average compound return earned per year over a multiyear periodD Positive square root of the average compound returnE Total compound return divided by the number of individual returns A
One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the:A stock price increased by 3.1 percent over the last year.B stock increased in value over the past year.C stock paid a dividend.D sum of the dividend yield and the capital gains yield is 3.1 percent.E dividend yield is greater than zero. D
Which one of the following combinations will always result in an increased dividend yield?A Decrease in the stock price combined with a higher dividend amountB Increase in the stock price combined with a constant dividend amountC Increase in the stock price combined with a higher dividend amountD Decrease in the stock price combined with a lower dividend amountE Increase in the stock price combined with a lower dividend amount A
Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?A The dollar return considers the time value of money while the percentage return does not.B The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not.C Without the size of an investment, the dollar return has less value than the percentage return.D Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive.E Dollar returns are based on capital gains while percentage returns are based on the total rate of return. C
One year ago, you bought a stock for $29.15 a share. You received a dividend of $1.04 per share last month and sold the stock today for $28.80 a share. What is the capital gains yield on this investment?A 1.76 percentB -1.20 percentC -1.62 percentD 2.37 percentE .53 percent B
If the financial markets are semistrong form efficient, then:A only the most talented analysts can determine the true value of a security.B only individuals with private information have a marketplace advantage.C no one individual has an advantage in the marketplace.D technical analysis provides the best tool to use to gain a marketplace advantage.E every security offers the same rate of return. B
If the financial markets are efficient then:A stock prices will change only when an event actually occurs, not at the time the event is anticipated.B stock prices should respond only to unexpected news and events.C stock prices should remain constant.D an increase in the value of one security should be offset by a decrease in the value of another security.E stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. B

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