Deck 12: Some Lessons From Capital Market History

Question 1

Small stocks have grown faster than the rate of inflation over the period 1957-2005.

Answer 1

True

Question 2

Stocks of small companies have higher average returns than those of larger companies.

Answer 2

True

Question 3

Small-company stocks offer a higher return and less risk than large-company stocks.

Answer 3

False

Question 4

Investors shouldn't count capital gains as part of total returns until the security is sold, since the
capital gain is really only a "paper gain" up to that point.

Question 5

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

Question 6

On the basis of historical data from the 1948-2002 period, the return on the average common stock
has fluctuated less than the return on the average stock of small firms.

Question 7

Treasury bills have grown faster than the rate of inflation over the period 1957-2005.

Question 8

With a mean of 5% and a standard deviation of 10%, the probability of earning more than 25% in any
one year is no more than 2.5%.

Question 9

Long bonds have higher average yields than Treasury bills.

Question 10

Risky securities have higher average returns than riskless securities.

Question 11

A growth stock is a stock that results in a high return with relatively low levels of risk.

Question 12

The 99% probability range is equal to the mean plus or minus three times the variance.

Question 13

The total return on a security is made up of two components: the capital gains component and the
price appreciation component.

Question 14

On the basis of historical data from the 1957-2005 period, the return on the average Treasury bill
has fluctuated more than the return on the average long bond.

Question 15

In general, the longer the term of an investment the lower the risk premium will be.

Question 16

Historical information about capital markets is useful for drawing conclusions about the relationship
between risk and return.

Question 17

If the lowest return for a 68% probability range is -21%, then there is a 32% chance that the loss in
any one year will be greater than 21%.

Question 18

Canadian common stocks have grown faster than the rate of inflation over the period 1957-2005.

Question 19

The risk-free rate of return is based on the long-term government bond rate.

Question 20

To accept higher levels of risk, investors must be paid a higher risk premium.

Question 21

A strong form of market efficiency is considered to hold in well-organized markets.

Question 22

The higher the standard deviation, the less predictable the rate of return in any one year.

Question 23

The larger the variance, the higher the expected return.

Question 24

The standard deviation can be negative, positive, or equal to zero.

Question 25

In efficient markets, investments have an expected return equal to zero.

Question 26

The higher the standard deviation, the less certain the rate of return in any one given year.

Question 27

The higher the standard deviation, the higher the expected return.

Question 28

According to theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are semi-strong-form efficient.

Question 29

The standard deviation measures the volatility of a security's returns.

Question 30

The lower the standard deviation, the lower the level of risk.

Question 31

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

Question 32

The larger the variance, the larger the standard deviation.

Question 33

According to theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are strong-form efficient.

Question 34

The standard deviation is a measure of volatility.

Question 35

In efficient markets, investments have an expected risk premium equal to zero.

Question 36

The 95% probability range is equal to the mean plus or minus three standard deviations.

Question 37

The larger the variance, the greater the risk of the investment.

Question 38

The greater the standard deviation, the lower the risk.

Question 39

The lessons from capital market history tell us that the TSX is an inefficient market.

Question 40

The larger the variance, the more the actual returns tend to differ from the average return.

Question 41

Market prices continually fluctuating reinforces the argument that the financial markets are efficient.

Question 42

The tremendous competition in the financial markets reinforces the argument that the financial
markets are efficient.

Question 43

If a market has semi-strong efficiency, then all public information is included in market prices.

Question 44

The lessons from capital market history tell us that there is a reward for bearing risk.

Question 45

Information spreading rapidly in today's world reinforces the argument that the financial markets are
efficient.

Question 46

On most days, you notice that stock prices fluctuate wildly. It is obvious to you that markets are
inefficient during this period.

Question 47

If a market has semi-strong efficiency, then all information of any kind is included in market prices.

Question 48

A weak form efficiency of market efficiency is considered to hold in well-organized markets.

Question 49

Your classmate just made $10,000 in a single day by trading in the stock market. It is reasonable to
conclude, therefore, that the efficient market hypothesis cannot be true.

Question 50

If a market has semi-strong efficiency, then all historical information is included in market prices.

Question 51

In efficient markets, investments have an expected NPV equal to zero.

Question 52

The lessons from capital market history tell us that the greater the potential reward from a risky
asset, the greater is the risk.

Question 53

Capital market efficiency is attributable largely to the lack of competition among market participants
for information.

Question 54

Market prices reacting suddenly to unexpected news announcements reinforces the argument that
the financial markets are efficient.

Question 55

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 dollar return for the investment?

A) $0
B) $750
C) $1,250
D) $1,500
E) $1,750

Question 56

If insiders were allowed to profit on their inside information without penalty, financial markets would
be less efficient.

Question 57

Seven months ago, you purchased 300 shares of Stadford, Inc. stock at a price of $48.30 a share. The company pays quarterly dividends of $.40 a share. Today, you sold all of your shares for
$45)20 a share. What is your total percentage return on this investment?

A) - 6.4%
B) - 4.8%
C) - 3.1%
D) 8.1%
E) 9.7%

Question 58

According to theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are weak-form efficient.

Question 59

If a market has semi-strong efficiency, then all insider information is included in market prices.

Question 60

Asemi-strong form efficiency of market efficiency is considered to hold in well-organized markets.

Question 61

Six months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC stock pays a quarterly dividend of $.10 a share. Today, you sold all of your shares for $45.13 per
Share. What is the total amount of your capital gains on this investment?

A) $1.24
B) $1.64
C) $40.00
D) $124.00
E) $164.00

Question 62

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

A) $.40
B) $1.60
C) $2.10
D) $2.50
E) $3.70

Question 63

$1 invested in Canadian Treasury bills in 1957 would have increased in value to approximately ____ by 2005.

A) $10
B) $23
C) $30
D) $43
E) $60

Question 64

Six months ago, you purchased 1,300 shares of New Tech stock for $12.70 a share. You have received dividend payments equal to $.05 a share. Today, you sold all of your shares for $14.20 a
Share. What is your total dollar return on this investment?

A) $650
B) $1,025
C) $1,885
D) $1,950
E) $2,015

Question 65

A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $28.14
Per share. What is your total dollar return on this investment?

A) $5,703
B) $5,733
C) $5,753
D) $5,763
E) $5,853

Question 66

Analog, Inc. stock is currently selling for $16.92 a share. The stock has a dividend yield of 1.3%. How much dividend income will you receive per year if you purchase 600 shares of this stock?

A) $124.50
B) $127.46
C) $128.03
D) $129.11
E) $131.98

Question 67

You just sold 400 shares of Bosley, Inc. stock at a price of $49.60 a share. Last year you paid $50.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.96
Per share. What is your capital gain on this investment?

A) -$424
B) -$360
C) $360
D) $424
E) $784

Question 68

One year ago, Kyra purchased a ten-year 5% corporate bond for $986. The bond is currently selling for $1,002. If Kyra sells the bond today, what is the dollar amount of the total return she would
Realize on this investment?

A) $14
B) $16
C) $34
D) $44
E) $66

Question 69

$1 invested in large company stocks in 1957 would have increased in value to approximately _____ by 2005.

A) $60
B) $97
C) $492
D) $1,953
E) $13,185

Question 70

You just sold 200 shares of Langley, Inc. stock at a price of $38.75 a share. Last year you paid $41.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.64
Per share. What is your capital gain on this investment?

A) -$550
B) -$222
C) -$3
D) $550
E) $878

Question 71

You purchased a stock one year ago for $91.20. Today you sold the stock and realized a total return of -63.7% on your investment. During the year you received a total of $2.28 in dividends. At what
Price did you sell the stock?

A) $28.55
B) $30.83
C) $33.11
D) $55.81
E) $58.09

Question 72

One year ago, Tina purchased 200 shares of Addado Companies at a cost of $38.90 a share. The stock pays quarterly dividends of $.65 per share. Today, Tina sold her shares for $41.20 per share.
How much dividend income did Tina receive as a result of her ownership of these shares?

A) $130
B) $275
C) $460
D) $520
E) $590

Question 73

Bankers, Inc. stock is currently selling for $80 a share. The stock has a dividend yield of 4.2%. How much dividend income will you receive per year if you purchase 150 shares of this stock?

A) $120
B) $336
C) $504
D) $630
E) $1,905

Question 74

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?

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

Question 75

Winslow, Inc. stock is currently selling for $40 a share. The stock has a dividend yield of 3.8%. How much dividend income will you receive per year if you purchase 500 shares of this stock?

A) $152
B) $190
C) $329
D) $760
E) $1,053

Question 76

One year ago, you purchased 600 shares of Westover Paints stock at a price of $3.68 per share. The stock pays an annual dividend of $.02 per share. Today, you sold all of your shares for $11.21
Per share. What is your total dollar return on this investment?

A) $4,518
B) $4,530
C) $4,542
D) $4,575
E) $5,120

Question 77

A year ago, you purchased 200 shares of Holland Enterprises, Inc. stock at a price of $15.54 per share. The stock pays an annual dividend of $.20 per share. Today, you sold all of your shares for
$17)70 per share. What is your total dollar return on this investment?

A) $140
B) $160
C) $216
D) $432
E) $472

Question 78

One year ago, you purchased a stock at a price of $28.75. The stock pays quarterly dividends of $.35 per share. Today, the stock is worth $31.25 per share. What is the total amount of your capital
Gains to date from this investment?

A) $0.70
B) $1.10
C) $1.40
D) $2.50
E) $3.90

Question 79

One year ago, Yokino purchased 100 shares of stock for $3,896. Since that time, he has received a total of $180 in dividends. If he sells the stock at today's market price he will realize a total return on
His investment of 10.37%. Assuming he sells the stock today, what is the dollar amount of his capital
Gain per share of stock?

A) $1.80
B) $2.24
C) $3.68
D) $4.04
E) $5.84

Question 80

Eight months ago, Turner purchased 100 shares of Delta Frames stock at a price of $47.08 a share. Delta pays a quarterly dividend of $1.10 a share. Today, Turner sold all of his shares for $48.63 per
Share. What is Turner's total capital gain on this investment?

A) $155
B) $180
C) $265
D) $360
E) $375