Finance V

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. Less than.
Which one of the following is defined by its mean and its standard deviation? Normal distribution
What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? 16 percent
A stock had annual returns of 4.8 percent, -11.6 percent, 18.2 percent, and 7.4 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 30percent or more in a single year? Less than 2.5 percent but more than .5 percentAverage return = (.048 – .116 + .182 + .074)/4 = .047, or 4.7 percentσ = √[1/(4 – 1)] [(.048 – .047)2 + (-.116 – .047)2 + (.182 – .047)2 + (.074 – .047)2] = .12319, or 12.319 percent Upper end of 95 percent range = .047 + (2 ×.12319) = .2934, or 29.34 percentUpper end of 99 percent range = .047 + (3 ×.12319) = .4166, or 41.66 percent A return of 30percent or more in a single year has less than a 2.5 percent but more than a .5 percent chance of occurring.
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013? U.S. Treasury bills
Which one of the following statements is correct concerning market efficiency? A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
What was the average rate of inflation over the period of 1926-2013? Between 2.8 and 3.2 percent
The return earned in an average year over a multiyear period is called the _____ average return. Arithmetic
Which one of the following statements is correct based on the historical record for the period 1926-2013? Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.
What was the highest annual rate of inflation during the period 1926-2013? Between 15 and 20 percent
Which of the following yields on a stock can be negative? Capital gains yield and total return
Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. Overestimate; underestimate
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 6 percent, -14 percent, 12percent, 9 percent, and 11 percent. Suppose the average inflation rate over this time period was 2.8 percent and the average T-bill rate was 3.2 percent. Based on this information, what was the average nominal risk premium? 1.60 percentAverage return = (.06 – .14 + .12 + .09 + .11)/5= .048, or 4.8 percentAverage nominal risk premium = .048 – .032 = .016, or 1.60 percent
A stock had annual returns of 6 percent, 13 percent, 11 percent, -8 percent, and3 percent for the past five years, respectively. What is the standard deviation of returns for this stock? 8.28 percentAverage return = (.06 + .13 + .11 – .08 + .03)/5 = .05Standard deviation = √[1/(5 – 1)] [(.06 – .05)2 + (.13 – .05)2 +(.11 – .05)2 +(-.08 – .05)2 + (.03 – .05)2] =.0828, or 8.28 percent
A stock had returns of 12 percent, 16 percent, 10 percent, 19 percent, 15 percent, and -6 percent over the last six years. What is the geometric average return on the stock for this period? 10.68 percentGeometric average = (1.12 �1.16 �1.10 �1.19 �1.15 �.94)1/6 – 1 = .1068, or 10.68 percent
A stock had returns of 4 percent, 11 percent, 16 percent, -6 percent, and -2 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year? Greater than 2.5 percent but less than 16 percent.Average return = (.04 + .11 + .16 – .06 – .02)/5 = .046, or 4.6 percent σ = √[1/(5 – 1)] [(.04 – .046)2 + (.11 -.046)2 + (.16 – .046)2 + (-.06 -0.046)2 + (-.02 -.046)2] = .0904, or 9.04 percent Upper end of 68 percent range = .046 + (1 ×.0904) = .1364, or 13.64 percentUpper end of 95 percent range = .046 – (2 × .0904) = .2268, or 22.68 percent Probability of earning at least 20 percent in any one year is greater than 2.5 percent but less than 16 percent. less than 16 percent.
Christina purchased 200 shares of stock at a price of $62.30 a share and sold them for $70.25 a share. She also received $148 in dividends. If the inflation rate was 4.2 percent, What was her approximate real rate of return on this investment? 9.75 percentNominal return = [$70.25 – 62.30 + ($148 /200)]/$62.30 = .1395, or 13.95 percentApproximate real return = 13.95 percent – 4.2 percent = 9.75 percent
The historical record for the period 1926-2013 supports which one of the following statements? Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.
Over the past four years a stock had prices of $15.40, $15.85, $16.30, and $15.70, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock? 3.80 percentReturn for year 2 = ($15.85-15.40 + .50)/$15.40 = .06169Return for year 3 = ($16.30 – 15.85 + .50)/$15.85 = .05994Return for year 4 = ($15.70 – 16.30 + .50)/$16.30 = -.00613Geometric return = (1.06169 ×1.05994 ×.99387)1/3 – 1 = .0380, or 3.80 percent
Suppose you bought a 6 percent coupon bond one year ago for $950. The face value of the bond is $1,000. You sold the bond today for $994. If the inflation rate last year was 3.1percent, what was your total real rate of return on this investment? 7.61 percentNominal return = ($994 – 950 + 60)/$950 = .1095. or 10.95 percentReal return = [(1 + .1095)/(1 + .031)] – 1 = .0761, or 7.61percent
Evidence seems to support the view that studying public information to identify mispriced stocks is: Ineffective .
Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: Decreased proportionately with the dividend decrease.
Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield? 8.75 percentCapital gains yield = ($87 – 80)/$80 = .0875, or 8.75 percent
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock’s issuer is released? Assume the market is semi strong form efficient. The information was expected
A stock has annual returns of 5.4 percent, 12.9 percent, -3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. 5.98; 5.79Arithmetic average = (.054 + .129 – .038+ .094)/4 = .0598, or 5.98 percentGeometric return = (1.054 ×1.129 ×.962 ×1.094).25 – 1 = .0579. or 5.79 percent
Standard deviation is a measure of which one of the following? Volatility
A stock has annual returns of 5 percent, 21 percent, -12 percent, 7 percent, and -6 percent for the past five years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. 3.00; 2.37Arithmetic average = (.05 + .21- .12 + .07 – .06)/5 =.03, or 3 percentGeometric return = (1.05 ×1.21 ×.88 ×1.07 ×.94).20 – 1 = .0237, or 2.37 percent
A stock had returns of 14 percent, 13 percent, -10 percent, and 7 percent for the past four years. Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year? Greater than 84 percent but less than 97.5 percent.Average return = (.14 + .13 – .10 + .07)/4 = .06, or 6 percent σ = √[1/(4 – 1)][(.14 – .06)2 + (.13 – .06)2 + (-.10 – .06)2 + (.07 – .06)2] = .1111, or 11.11 percent Lower bound of 68 percent range = .06 – (1 ×.1111) = -5.11 percentLower bound of 95 percent range = .06 – (2 ×.1111) = -16.22 percent Probability of losing more than 10 percent in any given year is between 2.5 and 16 percent. Thus, the probability of NOT losing more than 10 percent is between 84 and 97.5 percent.
Aimee is the owner of a stock with annual returns of 27 percent, -32 percent, 11 percent, and 23 percent for the past four years. She thinks the stock may be able to achieve a return of 50 percent or more in a single year. What is the probability that your friend is correct? Greater than 2.5 percent but less than 16 percent.Average return = (.27 – .32 + .11 + .23)/4 = .0725, or 7.25 percent σ = √[1/(4 – 1)] [(.27 – .0725)2 + (-.32 – .0725)2 + (.11 – .0725)2 + (.23 – .0725)2] = .2704, or 27.04 percent Upper end of 68 percent range = .0725 + (1 ×.2704) = .3429, or 34.29 percentUpper end of 95 percent range = .0725 + (2 ×.2704) = .6133, or 61.33 percent The probability of earning at least 50 percent in any one year is greater than 2.5 percent but less than 16 percent.
Inside information has the least value when financial markets are: Strong form efficient.
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. Strong
Which of the following statements are true based on the historical record for 1926-2013? Bonds are generally a safer investment than are stocks.
You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually 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. Semi strong
You own 1,200 shares of Western Feed Mills stock valued at $46.80 per share. What is the dividend yield if your annual dividend income is $1,644? 2.93 percentDividend yield = ($1,644/1,200)/$46.80 = .0293, or 2.93 percent
You just sold 300 shares of stock at a price of $42.06 a share. You purchased the stock for $39.80 a share and have received total dividends of $1,272. What is the total capital gain on this investment? $678Capital gain = ($42.06-39.80) �300 = $678 ,
The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2013. 5
You bought one of Shark Repellant’s 8 percent coupon bonds one year ago for $802. These bonds pay annual payments, have a face value of $1,000, and mature 14 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 12 percent. The inflation rate over the past year was 3.7 percent. What was your total real return on this investment? -2.02 percentP = $80({1 – [1 / (1.12)14]} / .12) + $1,000 / 1.1214 = $734.87Nominal return = ($734.87 – 802 + 80)/$802= .0160, or 1.6 percentReal return = [(1 + .0160)/(1 + .037)] – 1 =-.0202, or -2.02 percent
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 2 percent, -12 percent, 16 percent, 22 percent, and 18 percent. What is the variance of these returns? .01972Average = (.02 – .12 + .16 + .22 + .18)/5 = .092Variance = [1/(5 – 1)] [(.02 – .092)2 + (-.12 – .092)2 + (.16 – .092)2 + (.22 – .092)2 + (.18 – .092)2] = .01972
Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2013? The annual rate of return was always positive.
If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following to occur as a result? Decrease in the 68 percent probability range of returns
One year ago, you purchased a stock at a price of $32.15. The stock pays quarterly dividends of $.20 per share. Today, the stock is selling for $33.09 per share. What is your capital gain on this investment? $.94Capital gain = $33.09-32.15 = $.94
Which one of the following correctly describes the dividend yield? Next year’s annual dividend divided by today’s stock price.
Four months ago, you purchased 1,200 shares of LBM stock for $9.30 a share. Last month you received a dividend payment of $.065 a share. Today, you sold the shares for $8.62 a share. What is your total dollar return on this investment? -$738Total dollar return = ($8.62- 9.30 + .065) ×1,200 = -$738
The primary purpose of Blume’s formula is to: Project future rates of return.
One year ago, you purchased 100 shares of Best Wings stock at a price of $49.65 a share. The company pays an annual dividend of $.64 per share. Today, you sold for the shares for $43.30 a share. What is your total percentage return on this investment? -11.50 percentTotal percentage return = ($43.30 – 49.65 + .64)/$49.65 = -.1150, or -11.50 percent

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