Question 1

Which one of the following is a correct statement concerning risk premium?

Accepted Answer

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 rate of return, the greater the risk premium. 
D)  The risk premium is not correlated 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. 
B)  The lower the volatility of returns, the greater the risk premium. 
C)  The lower the average rate of return, the greater the risk premium. 
D)  The risk premium is not correlated to the average rate of return. 
E)  The risk premium is not affected by the volatility of returns. A

Question 2

The larger the variance, the larger the standard deviation.

Accepted Answer

A) True 
 B)False  True

Question 3

A stock returned 14%, -22%, 3%, and 34% over the past four years, respectively. What is the standard deviation of this stock based on the past four years?

Accepted Answer

A)  23.34% 
B)  26.98% 
C)  31.60% 
D)  38.67% 
E)  40.43% 
A)  23.34% 
B)  26.98% 
C)  31.60% 
D)  38.67% 
E)  40.43% A

Question 4

Which of the following is the best definition for the concept of arithmetic average return?

Accepted Answer

A)  The return earned in an average year over a multi-year period. 
B)  The hypothesis is that actual capital markets are efficient. 
C)  The average squared deviation between the actual return and the average return. 
D)  Statistical measure of maximum loss used by banks and other financial institutions to manage risk exposures. 
E)  The positive square root of the variance. 
A)  The return earned in an average year over a multi-year period. 
B)  The hypothesis is that actual capital markets are efficient. 
C)  The average squared deviation between the actual return and the average return. 
D)  Statistical measure of maximum loss used by banks and other financial institutions to manage risk exposures. 
E)  The positive square root of the variance.

Question 5

Bianco Corporation has experienced returns of -5%, 20%, 10% and -8% returns over the past four years. Given this information, calculate the company's standard deviation.

Accepted Answer

A)  13.12% 
B)  10.08% 
C)  8.02% 
D)  6.09% 
E)  5.89% 
A)  13.12% 
B)  10.08% 
C)  8.02% 
D)  6.09% 
E)  5.89%

Question 6

You purchase 100 shares of stock at a price of $45 per share. One year later, the shares are selling for $47 per share. In addition, a dividend of $4 per share is paid at the end of each year.

What is the capital gains yield for the investment?

Accepted Answer

A)  4.4% 
B)  5.5% 
C)  8.5% 
D)  8.9% 
E)  13.3% 
A)  4.4% 
B)  5.5% 
C)  8.5% 
D)  8.9% 
E)  13.3%

Question 7

A stock has returns of 5%, 16%, -18%, and 11% for the past four years. Based on this information, what is the 99% probability range for any one given year?

Accepted Answer

A)  -8.6 to 13.6% 
B)  -11.5 to 18.5% 
C)  -26.5 to 33.5% 
D)  -35.5 to 42.5% 
E)  -41.6 to 48.6% 
A)  -8.6 to 13.6% 
B)  -11.5 to 18.5% 
C)  -26.5 to 33.5% 
D)  -35.5 to 42.5% 
E)  -41.6 to 48.6%

Question 8

The mean is equal to the average variance of an investment over a period of time.

Accepted Answer

A) True 
 B)False

Question 9

Over the past 50 years, which of the following investments has provided the smallest average return?

Accepted Answer

A)  Canadian common stocks 
B)  U.S. common stocks 
C)  Treasury bills 
D)  Long bonds 
E)  Canadian small stocks 
A)  Canadian common stocks 
B)  U.S. common stocks 
C)  Treasury bills 
D)  Long bonds 
E)  Canadian small stocks

Question 10

Long bonds have higher average yields than Treasury bills.

Accepted Answer

A) True 
 B)False

Question 11

You purchased 200 shares of preferred stock on January 1, 2002 for $42.27 per share. The stock pays an annual dividend of $7 per share. On December 31, 2002 the market price is $46.88 per share. What is your total dollar return for the year?

Accepted Answer

A)  $478 
B)  $922 
C)  $1,400 
D)  $2,322 
E)  $2,678 
A)  $478 
B)  $922 
C)  $1,400 
D)  $2,322 
E)  $2,678

Question 12

As long as the inflation rate is positive, the real rate of return on a security investment will be ____ the nominal rate of return.

Accepted Answer

A)  Greater than. 
B)  Equal to. 
C)  Less than. 
D)  Greater than or equal to. 
E)  Unrelated to. 
A)  Greater than. 
B)  Equal to. 
C)  Less than. 
D)  Greater than or equal to. 
E)  Unrelated to.

Question 13

You purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for $21 each. At that end of the year, a $1.50 per share dividend was paid.

What is the total percentage return for the investment?

Accepted Answer

A)  -7.1% 
B)  -6.7% 
C)  0.0% 
D)  6.7% 
E)  7.1% 
A)  -7.1% 
B)  -6.7% 
C)  0.0% 
D)  6.7% 
E)  7.1%

Question 14

ABC stock pays a $1.80 annual dividend. The market price of the stock was $21.74, $19.83, $22.60, and $23.10 at the end of the past four years, respectively. Based on this information, what is the mean rate of return?

Accepted Answer

A)  9.67% 
B)  10.91% 
C)  11.25% 
D)  19.14% 
E)  21.82% 
A)  9.67% 
B)  10.91% 
C)  11.25% 
D)  19.14% 
E)  21.82%

Question 15

Federico paid $86.70 for a stock one year ago. Today he sold the stock for $88.20. Over the year, Federico received four quarterly dividends of $0.60 each. What was the dividend yield on this investment?

Accepted Answer

A)  0.69% 
B)  1.02% 
C)  2.77% 
D)  4.42% 
E)  4.50% 
A)  0.69% 
B)  1.02% 
C)  2.77% 
D)  4.42% 
E)  4.50%

Question 16

If a market is efficient, then the difference between the market value of an investment and its cost is:

Accepted Answer

A)  Zero. 
B)  Positive and greater than 1. 
C)  Equal to the risk premium. 
D)  Equal to the net present value of the cash inflows. 
E)  Equal to the risk-free rate of return. 
A)  Zero. 
B)  Positive and greater than 1. 
C)  Equal to the risk premium. 
D)  Equal to the net present value of the cash inflows. 
E)  Equal to the risk-free rate of return.

Question 17

Treasury bills:

Accepted Answer

A)  Are considered risk-free as they match or outperform inflation every year. 
B)  Usually generate a higher rate of return than long-term government bonds. 
C)  Outperformed inflation on an annual basis for every year during the period of 1957-2005. 
D)  Always yield an annual rate of return between 1 and 6%. 
E)  Outperformed inflation over the long-term as seen in the historical record for 1957-2005. 
A)  Are considered risk-free as they match or outperform inflation every year. 
B)  Usually generate a higher rate of return than long-term government bonds. 
C)  Outperformed inflation on an annual basis for every year during the period of 1957-2005. 
D)  Always yield an annual rate of return between 1 and 6%. 
E)  Outperformed inflation over the long-term as seen in the historical record for 1957-2005.

Question 18

Which of the following is NOT correct with regards to the Efficient Markets Hypothesis?

Accepted Answer

A)  The EMH suggests that there are no positive NPV investments, on average. 
B)  The EMH asserts that information has been "priced out" of stocks. 
C)  The EMH refers to well-organized capital markets. 
D)  The EMH suggests that the prices on the TSX are fair, on average. 
E)  The EMH suggests that markets in which prices fluctuate a great deal cannot be efficient. 
A)  The EMH suggests that there are no positive NPV investments, on average. 
B)  The EMH asserts that information has been "priced out" of stocks. 
C)  The EMH refers to well-organized capital markets. 
D)  The EMH suggests that the prices on the TSX are fair, on average. 
E)  The EMH suggests that markets in which prices fluctuate a great deal cannot be efficient.

Question 19

Generally speaking, financial markets are less efficient than real asset markets.

Accepted Answer

A) True 
 B)False

Question 20

What is the amount of the excess return on a risk - free security if the risk - free rate is 4% and the market rate of return is 11%?

Accepted Answer

A)  0% 
B)  2% 
C)  4% 
D)  7% 
E)  11% 
A)  0% 
B)  2% 
C)  4% 
D)  7% 
E)  11%

Exam 12: Lessons From Capital Market History

Which one of the following is a correct statement concerning risk premium?

The larger the variance, the larger the standard deviation.

A stock returned 14%, -22%, 3%, and 34% over the past four years, respectively. What is the standard deviation of this stock based on the past four years?

Which of the following is the best definition for the concept of arithmetic average return?

Bianco Corporation has experienced returns of -5%, 20%, 10% and -8% returns over the past four years. Given this information, calculate the company's standard deviation.

You purchase 100 shares of stock at a price of $45 per share. One year later, the shares are selling for $47 per share. In addition, a dividend of $4 per share is paid at the end of each year. What is the capital gains yield for the investment?

A stock has returns of 5%, 16%, -18%, and 11% for the past four years. Based on this information, what is the 99% probability range for any one given year?

The mean is equal to the average variance of an investment over a period of time.

Over the past 50 years, which of the following investments has provided the smallest average return?

Long bonds have higher average yields than Treasury bills.

You purchased 200 shares of preferred stock on January 1, 2002 for $42.27 per share. The stock pays an annual dividend of $7 per share. On December 31, 2002 the market price is $46.88 per share. What is your total dollar return for the year?

As long as the inflation rate is positive, the real rate of return on a security investment will be ____ the nominal rate of return.

You purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for $21 each. At that end of the year, a $1.50 per share dividend was paid. What is the total percentage return for the investment?

ABC stock pays a $1.80 annual dividend. The market price of the stock was $21.74, $19.83, $22.60, and $23.10 at the end of the past four years, respectively. Based on this information, what is the mean rate of return?

Federico paid $86.70 for a stock one year ago. Today he sold the stock for $88.20. Over the year, Federico received four quarterly dividends of $0.60 each. What was the dividend yield on this investment?

If a market is efficient, then the difference between the market value of an investment and its cost is:

Treasury bills:

Which of the following is NOT correct with regards to the Efficient Markets Hypothesis?

Generally speaking, financial markets are less efficient than real asset markets.

What is the amount of the excess return on a risk - free security if the risk - free rate is 4% and the market rate of return is 11%?

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

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