Exam 7: An Introduction to Risk and Return-History of Financial Market Returns

You are considering investing in a firm that has the following possible outcomes: Economic boom: probability of 25%; return of 25% Economic growth: probability of 60%; return of 15% Economic decline: probability of 15%; return of -5% What is the expected rate of return on the investment?

Are markets moving toward being more efficient or toward being less efficient?

If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock.

Over the period 1995-2015, the risk-return relationship appears to be

If an investor earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss.

If an individual with inside information can make higher than expected profits, the market is no more than semi-strong form efficient.

Marcus Berger invested $9842.33 in Hawkeye Hats, Inc. four years ago. He sold the stock today for $11,396.22. What is his geometric average return?

If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?

Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average. This outcome supports

Which of the following best measures an asset's risk?

Because returns are more certain for the least risky investments, the required return on these investments should be higher than the required returns on more risky investments.

What is the geometric average return of Roddy's Richard's investment?

An investor who wishes to hold a stock for five years will be most interested in the geometric average rather than in the arithmetic average return.

Less risky investments have lower standard deviations than do more risky investments.

You have invested in a project that has the following payoff schedule: Probability of Payoff Occurrence $40 .15 $50 .20 $60 .30 $70 .30 $80 .05 What is the expected value of the investment's payoff? (Round to the nearest $1.)

Why do the arithmetic average return and the geometric return differ?

Which of the following is consistent with the semi-strong form efficient market hypothesis?

The expected rate of return is the weighted average of the possible returns for an investment.

The higher the standard deviation, the less risk the investment has.

Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.