Question 1

Over the period of 1926 to 2005 in the US,the average rate of inflation was _____ %.

Accepted Answer

A) 2.0 
B) 2.7 
C) 3.1 
D) 3.8 
E) 4.3 
A) 2.0 
B) 2.7 
C) 3.1 
D) 3.8 
E) 4.3

Question 2

An equity had returns of 8%,14%,and 2% for the past three years.Based on these returns,what is the probability that this equity will earn at least 20% in any one given year?

Accepted Answer

A) 0.5% 
B) 1.0% 
C) 2.5% 
D) 5.0% 
E) 16.0% 
A) 0.5% 
B) 1.0% 
C) 2.5% 
D) 5.0% 
E) 16.0%

Question 3

Which of the following statements are correct concerning the variance of the annual returns on an investment?
I.The larger the variance,the more the actual returns tend to differ from the average return.
II.The larger the variance,the larger the standard deviation.
III.The larger the variance,the greater the risk of the investment.
IV.The larger the variance,the higher the expected return.

Accepted Answer

A) I and III only. 
B) II,III,and IV only. 
C) I,III,and IV only. 
D) I,II,and III only. 
E) I,II,III,and IV. 
A) I and III only. 
B) II,III,and IV only. 
C) I,III,and IV only. 
D) I,II,and III only. 
E) I,II,III,and IV.

Question 4

You bought 100 shares at £20 each.At the end of the year,you received a total of £400 in dividends,and your shares was worth £2,500 total.What was your total return?

Accepted Answer

A) 20% 
B) 45% 
C) 50% 
D) 90% 
E) None of the above. 
A) 20% 
B) 45% 
C) 50% 
D) 90% 
E) None of the above.

Question 5

One year ago,you purchased a stock at a price of £32.50.The equity pays quarterly dividends of £.40 per share.Today,the shares are worth £34.60.What is the total amount of your dividend income to date from this investment?

Accepted Answer

A) £0.40 
B) £1.60 
C) £2.10 
D) £2.50 
E) £3.70 
A) £0.40 
B) £1.60 
C) £2.10 
D) £2.50 
E) £3.70

Question 6

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

Accepted Answer

A) geometric average return. 
B) inflation premium. 
C) risk premium. 
D) time premium. 
E) arithmetic average return. 
A) geometric average return. 
B) inflation premium. 
C) risk premium. 
D) time premium. 
E) arithmetic average return.

Question 7

The capital gains yield plus the dividend yield on a security is called the:

Accepted Answer

A) variance of returns. 
B) geometric return. 
C) average period return. 
D) current yield. 
E) total return. 
A) variance of returns. 
B) geometric return. 
C) average period return. 
D) current yield. 
E) total return.

Question 8

Little John Industries sold for £1.90 on January 1 and ended the year at a price of £2.50.In addition,the equity paid dividends of £0.20 per share.Calculate Little John's dividend yield,capital gain yield,and total rate of return for the year.

Accepted Answer

Dividend yield = £0.20/£1.90 =

Question 9

The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%.What was the average risk premium you earned?

Accepted Answer

A) 2.9% 
B) 3.1% 
C) 9.3% 
D) 9.4% 
E) None of the above. 
A) 2.9% 
B) 3.1% 
C) 9.3% 
D) 9.4% 
E) None of the above.

Question 10

The average squared difference between the actual return and the average return is called the:

Accepted Answer

A) volatility return. 
B) variance. 
C) standard deviation. 
D) risk premium. 
E) excess return. 
A) volatility return. 
B) variance. 
C) standard deviation. 
D) risk premium. 
E) excess return.

Question 11

What are the arithmetic and geometric average returns for a share with annual returns of 4%,9%,-6%,and 18%?

Accepted Answer

A) 5.89%; 6.25% 
B) 6.25%; 5.89% 
C) 6.25%; 8.33% 
D) 8.3%; 5.89% 
E) 8.3%; 6.25% 
A) 5.89%; 6.25% 
B) 6.25%; 5.89% 
C) 6.25%; 8.33% 
D) 8.3%; 5.89% 
E) 8.3%; 6.25%

Question 12

A symmetric,bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution.

Accepted Answer

A) gamma 
B) Poisson 
C) bi-modal 
D) normal 
E) uniform 
A) gamma 
B) Poisson 
C) bi-modal 
D) normal 
E) uniform

Question 13

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2005 in the US?

Accepted Answer

A) U.S.Treasury bills 
B) long-term government bonds 
C) small company shares 
D) large company shares 
E) long-term corporate bonds 
A) U.S.Treasury bills 
B) long-term government bonds 
C) small company shares 
D) large company shares 
E) long-term corporate bonds

Question 14

Based on the period of 1926 through 2005 in the US,_____ have tended to outperform other securities over the long-term.

Accepted Answer

A) U.S.Treasury bills 
B) large company shares 
C) long-term corporate bonds 
D) small company shares 
E) long-term government bonds 
A) U.S.Treasury bills 
B) large company shares 
C) long-term corporate bonds 
D) small company shares 
E) long-term government bonds

Question 15

The average risk premium on U.S.Treasury bills over the period of 1926 to 2005 was _____ %.

Accepted Answer

A) 0.0 
B) 1.6 
C) 2.2 
D) 3.1 
E) 3.8 
A) 0.0 
B) 1.6 
C) 2.2 
D) 3.1 
E) 3.8

Question 16

Capital market history shows us that the average return relationship from lowest to highest between securities is:

Accepted Answer

A) inflation,corporate bonds,Treasuries,small company shares,large company shares. 
B) Treasury bills,inflation,small company shares,large company shares. 
C) Treasury bills,corporate bonds,government bonds,large common shares,small company shares. 
D) Treasury bills,government bonds,corporate bonds,large common shares,small company shares. 
E) There is no ordering. 
A) inflation,corporate bonds,Treasuries,small company shares,large company shares. 
B) Treasury bills,inflation,small company shares,large company shares. 
C) Treasury bills,corporate bonds,government bonds,large common shares,small company shares. 
D) Treasury bills,government bonds,corporate bonds,large common shares,small company shares. 
E) There is no ordering.

Question 17

The standard deviation on small US company shares: 
I.is greater than the standard deviation on large company shares.
II.is less than the standard deviation on large company shares.
III.had an average value of about 33 % for the period 1926 to 2005.
IV.had an average value of about 20 % for the period 1926 to 2005.

Accepted Answer

A) I and III only. 
B) I and II only. 
C) II and III only. 
D) II and IV only. 
E) I and IV only. 
A) I and III only. 
B) I and II only. 
C) II and III only. 
D) II and IV only. 
E) I and IV only.

Question 18

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

Accepted Answer

A) overestimate; overestimate 
B) overestimate; underestimate 
C) underestimate; overestimate 
D) underestimate; underestimate 
E) accurately; accurately 
A) overestimate; overestimate 
B) overestimate; underestimate 
C) underestimate; overestimate 
D) underestimate; underestimate 
E) accurately; accurately

Question 19

Over the past five years,a share produced returns of 14%,22%,-16%,2%,and 10%.What is the probability that an investor in this share will NOT lose more than 8% nor earn more than 21% in any one given year?

Accepted Answer

A) 34% 
B) 68% 
C) 95% 
D) 99% 
E) 100% 
A) 34% 
B) 68% 
C) 95% 
D) 99% 
E) 100%

Question 20

If the expected return on the market is 16%,then using the historical risk premium on large shares of 8.6%,the current risk-free rate is:

Accepted Answer

A) 4.6% 
B) 7.4% 
C) 8.4% 
D) 10.6% 
E) 12.6% 
A) 4.6% 
B) 7.4% 
C) 8.4% 
D) 10.6% 
E) 12.6%

Exam 9: Risk and Return: Lessons From Market History

Over the period of 1926 to 2005 in the US,the average rate of inflation was _____ %.

An equity had returns of 8%,14%,and 2% for the past three years.Based on these returns,what is the probability that this equity will earn at least 20% in any one given year?

You bought 100 shares at £20 each.At the end of the year,you received a total of £400 in dividends,and your shares was worth £2,500 total.What was your total return?

One year ago,you purchased a stock at a price of £32.50.The equity pays quarterly dividends of £.40 per share.Today,the shares are worth £34.60.What is the total amount of your dividend income to date from this investment?

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

The capital gains yield plus the dividend yield on a security is called the:

Little John Industries sold for £1.90 on January 1 and ended the year at a price of £2.50.In addition,the equity paid dividends of £0.20 per share.Calculate Little John's dividend yield,capital gain yield,and total rate of return for the year.

The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%.What was the average risk premium you earned?

The average squared difference between the actual return and the average return is called the:

What are the arithmetic and geometric average returns for a share with annual returns of 4%,9%,-6%,and 18%?

A symmetric,bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution.

Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 through 2005 in the US?

Based on the period of 1926 through 2005 in the US,_____ have tended to outperform other securities over the long-term.

The average risk premium on U.S.Treasury bills over the period of 1926 to 2005 was _____ %.

Capital market history shows us that the average return relationship from lowest to highest between securities is:

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

Over the past five years,a share produced returns of 14%,22%,-16%,2%,and 10%.What is the probability that an investor in this share will NOT lose more than 8% nor earn more than 21% in any one given year?

If the expected return on the market is 16%,then using the historical risk premium on large shares of 8.6%,the current risk-free rate is:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Return and Risk: The Capital Asset Pricing Model Capm

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: An Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Estimates using the arithmetic average will probably tend to _ values over the long-term while estimates using the geometric average will probably tend to _ values over the short-term.