Deck 12: Return, Risk and the Security Market

Question 1

Which one of the following is defined by its mean and its standard deviation?

A)arithmetic nominal return
B)geometric real return
C)normal distribution
D)variance
E)risk premium

Answer 1

C

Question 2

Which one of the following correctly describes the dividend yield?

A)next year's annual dividend divided by today's stock price
B)this year's annual dividend divided by today's stock price
C)this year's annual dividend divided by next year's expected stock price
D)next year's annual dividend divided by this year's annual dividend
E)the increase in next year's dividend over this year's dividend divided by this year's dividend

Answer 2

A

Question 3

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price.She received a total of $0.75 in dividends.Which one of the following statements is correct in relation to this investment?

A)The dividend yield is expressed as a percentage of the selling price.
B)The capital gain would have been less had Stacy not received the dividends.
C)The total dollar return per share is $3.
D)The capital gains yield is positive.
E)The dividend yield is greater than the capital gains yield.

Answer 3

D

Question 4

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

A)greater than
B)equal to
C)less than
D)greater than or equal to
E)unrelated to

Question 5

Small-company stocks, as the term is used in the textbook, are best defined as the:

A)500 newest corporations in the U.S.
B)firms whose stock trades OTC.
C)smallest twenty percent of the firms listed on the NYSE.
D)smallest twenty-five percent of the firms listed on NASDAQ.
E)firms whose stock is listed on NASDAQ.

Question 6

The return earned in an average year over a multi-year period is called the _____ average return.

A)arithmetic
B)standard
C)variant
D)geometric
E)real

Question 7

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent.Which one of the following terms refers to the difference between these two rates of return?

A)risk premium
B)geometric return
C)arithmetic
D)standard deviation
E)variance

Question 8

The real rate of return on a stock is approximately equal to the nominal rate of return:

A)multiplied by (1 + inflation rate).
B)plus the inflation rate.
C)minus the inflation rate.
D)divided by (1 + inflation rate).
E)divided by (1 - inflation rate).

Question 9

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:

A)was unaffected by the announcement.
B)increased proportionately with the dividend decrease.
C)decreased proportionately with the dividend decrease.
D)decreased by $0.14 per share.
E)increased by $0.14 per share.

Question 10

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities.Which one of the following terms best defines that market?

A)riskless market
B)evenly distributed market
C)zero volatility market
D)Blume's market
E)efficient capital market

Question 11

Which one of the following statements is a correct reflection of the U.S.markets for the period 1926-2010?

A)U.S.Treasury bill returns never exceeded a 9 percent return in any one year during the period.
B)U.S.Treasury bills provided a positive rate of return each and every year during the period.
C)Inflation equaled or exceeded the return on U.S.Treasury bills every year during the period.
D)Long-term government bonds outperformed U.S.Treasury bills every year during the period.
E)National deflation occurred at least once every decade during the period.

Question 12

Standard deviation is a measure of which one of the following?

A)average rate of return
B)volatility
C)probability
D)risk premium
E)real returns

Question 13

Which one of the following categories of securities had the highest average return for the period 1926-2010?

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

Question 14

Which one of the following best defines the variance of an investment's annual returns over a number of years?

A)The average squared difference between the arithmetic and the geometric average annual returns.
B)The squared summation of the differences between the actual returns and the average geometric return.
C)The average difference between the annual returns and the average return for the period.
D)The difference between the arithmetic average and the geometric average return for the period.
E)The average squared difference between the actual returns and the arithmetic average return.

Question 15

Which one of the following statements related to capital gains is correct?

A)The capital gains yield includes only realized capital gains.
B)An increase in an unrealized capital gain will increase the capital gains yield.
C)The capital gains yield must be either positive or equal to zero.
D)The capital gains yield is expressed as a percentage of the sales price.
E)The capital gains yield represents the total return earned by an investor.

Question 16

Which one of the following statements best defines the efficient market hypothesis?

A)Efficient markets limit competition.
B)Security prices in efficient markets remain steady as new information becomes available.
C)Mispriced securities are common in efficient markets.
D)All securities in an efficient market are zero net present value investments.
E)Profits are removed as a market incentive when markets become efficient.

Question 17

Which of the following statements is correct in relation to a stock investment?
I)The capital gains yield can be positive, negative, or zero.
II)The dividend yield can be positive, negative, or zero.
III)The total return can be positive, negative, or zero.
IV)Neither the dividend yield nor the total return can be negative.

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

Question 18

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

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

Question 19

The average compound return earned per year over a multi-year period is called the _____ average return.

A)arithmetic
B)standard
C)variant
D)geometric
E)real

Question 20

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?

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

Question 21

If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result?
I)decrease in the average rate of return
II)increase in the risk premium
III)increase in the 68 percent probability range of the frequency distribution of returns
IV)decrease in the standard deviation

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

Question 22

Which one of the following earned the highest risk premium over the period 1926-2010?

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

Question 23

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest.

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

Question 24

Which one of the following was the least volatile over the period of 1926-2010?

A)large-company stocks
B)inflation
C)long-term corporate bonds
D)U.S.Treasury bills
E)intermediate-term government bonds

Question 25

Which one of the following statements is correct based on the historical record for the period 1926-2010?

A)The standard deviation of returns for small-company stocks was double that of large-company stocks.
B)U.S.Treasury bills had a zero standard deviation of returns because they are considered to be risk-free.
C)Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.
D)Inflation was less volatile than the returns on U.S.Treasury bills.
E)Long-term government bonds underperformed intermediate-term government bonds.

Question 26

Which one of the following statements is correct?

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 return, the greater the risk premium.
D)The risk premium is unrelated to the average rate of return.
E)The risk premium is not affected by the volatility of returns.

Question 27

Which of the following statements are true based on the historical record for 1926-2010?
I)Risk and potential reward are inversely related.
II)Risk-free securities produce a positive real rate of return each year.
III)Returns are more predictable over the short-term than they are over the long-term.
IV)Bonds are generally a safer investment than are stocks.

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

Question 28

What was the average rate of inflation over the period of 1926-2010?

A)less than 2.0 percent
B)between 2.0 and 2.5 percent
C)between 2.5 and 3.0 percent
D)between 3.0 and 3.5 percent
E)greater than 3.5 percent

Question 29

Which one of the following statements concerning U.S.Treasury bills is correct for the period 1926- 2010?

A)The annual rate of return always exceeded the annual inflation rate.
B)The average risk premium was 0.7 percent.
C)The annual rate of return was always positive.
D)The average excess return was 1.1 percent.
E)The average real rate of return was zero.

Question 30

The historical record for the period 1926-2010 supports which one of the following statements?

A)A higher-risk security will provide a higher rate of return next year than will a lower-risk security.
B)If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds.
C)Increased long-run potential returns are obtained by lowering risks.
D)It is possible for small-company stocks to more than double in value in any one given year.
E)Inflation was positive each year throughout the period of 1926-2010.

Question 31

Assume that you invest in a portfolio of large-company stocks.Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010.What rate of return should you expect to earn?

A)less than 10 percent
B)between 10 and 12.5 percent
C)between 12.5 and 15 percent
D)between 15 and 17.5 percent
E)more than 17.5 percent

Question 32

Which of the following correspond to a wide frequency distribution?
I)relatively low risk
II)relatively low rate of return
III)relatively high standard deviation
IV)relatively large risk premium

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

Question 33

The excess return is computed as the:

A)return on a security minus the inflation rate.
B)return on a risky security minus the risk-free rate.
C)risk premium on a risky security minus the risk-free rate.
D)the risk-free rate plus the inflation rate.
E)risk-free rate minus the inflation rate.

Question 34

To convince investors to accept greater volatility, you must:

A)decrease the risk premium.
B)increase the risk premium.
C)decrease the real return.
D)decrease the risk-free rate.
E)increase the risk-free rate.

Question 35

The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2010.

A)3
B)5
C)7
D)9
E)11

Question 36

Which one of the following time periods is associated with high rates of inflation?

A)1929-1933
B)1957-1961
C)1978-1981
D)1992-1996
E)2001-2005

Question 37

Which one of the following statements correctly applies to the period 1926-2010?

A)Large-company stocks earned a higher average risk premium than did small-company stocks.
B)Intermediate-term government bonds had a higher average return than long-term corporate bonds.
C)Large-company stocks had an average annual return of 14.7 percent.
D)Inflation averaged 2.6 percent for the period.
E)U.S.Treasury bills had a positive average real rate of return.

Question 38

What was the highest annual rate of inflation during the period 1926-2010?

A)between 0 and 3 percent
B)between 3 and 5 percent
C)between 5 and 10 percent
D)between 10 and 15 percent
E)between 15 and 20 percent

Question 39

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

A)1.0 percent
B)2.5 percent
C)5.0 percent
D)16 percent
E)32 percent

Question 40

According to Jeremy Siegel, the real return on stocks over the long-term has averaged about:

A)6.7 percent
B)8.7 percent
C)10.4 percent
D)12.3 percent
E)14.8 percent

Question 41

One year ago, you purchased a stock at a price of $47.50 a share.Today, you sold the stock and realized a total loss of 22.11 percent.Your capital gain was -$12.70 a share.What was your dividend yield?

A)4.63 percent
B)4.88 percent
C)5.02 percent
D)12.67 percent
E)14.38 percent

Question 42

A year ago, you purchased 300 shares of Stellar Wood Products, Inc.stock at a price of $8.62 per share.The stock pays an annual dividend of $0.10 per share.Today, you sold all of your shares for $4.80 per share.What is your total dollar return on this investment?

A)-$382
B)-$1,372
C)-$1,528
D)-$1,116
E)-$1,360

Question 43

You own 400 shares of Western Feed Mills stock valued at $51.20 per share.What is the dividend yield if your annual dividend income is $352?

A)1.68 percent
B)1.72 percent
C)1.83 percent
D)1.13 percent
E)1.21 percent

Question 44

Individuals who continually monitor the financial markets seeking mispriced securities:

A)earn excess profits over the long-term.
B)make the markets increasingly more efficient.
C)are never able to find a security that is temporarily mispriced.
D)are overwhelmingly successful in earning abnormal profits.
E)are always quite successful using only historical price information as their basis of evaluation.

Question 45

The primary purpose of Blume's formula is to:

A)compute an accurate historical rate of return.
B)determine a stock's true current value.
C)consider compounding when estimating a rate of return.
D)determine the actual real rate of return.
E)project future rates of return.

Question 46

One year ago, you purchased a stock at a price of $33.49.The stock pays quarterly dividends of $0.20 per share.Today, the stock is selling for $28.20 per share.What is your capital gain on this investment?

A)-$5.49
B)-$5.29
C)-$4.76
D)-$4.16
E)-$5.09

Question 47

Which of the following statements related to market efficiency tend to be supported by current evidence?
I)Markets tend to respond quickly to new information.
II)It is difficult for investors to earn abnormal returns.
III)Short-run prices are difficult to predict accurately based on public information.
IV)Markets are most likely weak form efficient.

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

Question 48

If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

A)weak
B)semiweak
C)semistrong
D)strong
E)perfect

Question 49

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.

A)weak
B)semiweak
C)semistrong
D)strong
E)perfect

Question 50

According to theory, studying historical stock price movements to identify mispriced stocks:

A)is effective as long as the market is only semistrong form efficient.
B)is effective provided the market is only weak form efficient.
C)is ineffective even when the market is only weak form efficient.
D)becomes ineffective as soon as the market gains semistrong form efficiency.
E)is ineffective only in strong form efficient markets.

Question 51

West Wind Tours stock is currently selling for $48 a share.The stock has a dividend yield of 3.2 percent.How much dividend income will you receive per year if you purchase 200 shares of this stock?

A)$24.96
B)$36.20
C)$424.80
D)$362.00
E)$307.20

Question 52

Which one of the following is most indicative of a totally efficient stock market?

A)extraordinary returns earned on a routine basis
B)positive net present values on stock investments over the long-term
C)zero net present values for all stock investments
D)arbitrage opportunities which develop on a routine basis
E)realizing negative returns on a routine basis

Question 53

Which one of the following statements is correct concerning market efficiency?

A)Real asset markets are more efficient than financial markets.
B)If a market is efficient, arbitrage opportunities should be common.
C)In an efficient market, some market participants will have an advantage over others.
D)A firm will generally receive a fair price when it issues new shares of stock.
E)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

Question 54

Estimates of the rate of return on a security based on a 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.

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

Question 55

Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share.The stock pays a quarterly dividend of $0.15 a share.Today, you sold all of your shares for $40.10 per share.What is the total amount of your dividend income on this investment?

A)$15
B)$30
C)$45
D)$50
E)$60

Question 56

Efficient financial markets fluctuate continuously because:

A)the markets are continually reacting to old information as that information is absorbed.
B)the markets are continually reacting to new information.
C)arbitrage trading is limited.
D)current trading systems require human intervention.
E)investments produce varying levels of net present values.

Question 57

Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released?
I)insiders knew the information prior to the announcement
II)investors need time to digest the information prior to reacting
III)the information has no bearing on the value of the firm
IV)the information was anticipated

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

Question 58

Inside information has the least value when financial markets are:

A)weak form efficient.
B)semiweak form efficient.
C)semistrong form efficient.
D)strong form efficient.
E)inefficient.

Question 59

You just sold 600 shares of Wesley, Inc.stock at a price of $32.04 a share.Last year, you paid $30.92 a share to buy this stock.Over the course of the year, you received dividends totaling $1.20 per share.What is your total capital gain on this investment?

A)-$618
B)-$672
C)$672
D)$618
E)$720

Question 60

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.

A)weak
B)semiweak
C)semistrong
D)strong
E)perfect

Question 61

Your friend is the owner of a stock which had returns of 25 percent, -36 percent, 1 percent, and 16 percent for the past four years.Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year.Based on these returns, what is the probability that your friend is correct?

A)less than 0.5 percent
B)greater than 0.5 percent but less than 1.0 percent
C)greater than 1.0 percent but less than 2.5 percent
D)greater than 2.5 percent but less than 16 percent
E)greater than 16.0 percent

Question 62

What is the amount of the risk premium on a U.S.Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

A)0.00 percent
B)2.80 percent
C)5.55 percent
D)8.35 percent
E)11.15 percent

Question 63

Four months ago, you purchased 1,500 shares of Lakeside Bank stock for $11.20 a share.You have received dividend payments equal to $0.25 a share.Today, you sold all of your shares for $8.60 a share.What is your total dollar return on this investment?

A)-$3,900
B)-$3,525
C)-$3,150
D)-$2,950
E)-$2,875

Question 64

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.

A)3.89; 3.62
B)3.89; 4.60
C)3.62; 3.89
D)4.60; 3.62
E)4.60; 3.89

Question 65

A stock has returns of 18 percent, 15 percent, -21 percent, and 6 percent for the past four years.Based on this information, what is the 95 percent probability range of returns for any one given year?

A)-13.56 to 20.56 percent
B)-24.60 to 31.80 percent
C)-31.00 to 40.00 percent
D)-47.68 to 54.68 percent
E)-71.73 to 71.73 percent

Question 66

A stock has an expected rate of return of 13 percent and a standard deviation of 21 percent.Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year?

A)0.1 percent
B)0.5 percent
C)1.0 percent
D)2.5 percent
E)5.0 percent

Question 67

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?

A)greater than 0.5 but less than 1.0 percent
B)greater than 1.0 percent but less than 2.5 percent
C)greater than 2.5 percent but less than 16 percent
D)greater than 84 percent but less than 97.5 percent
E)greater than 95 percent

Question 68

Today, you sold 200 shares of Indian River Produce stock.Your total return on these shares is 6.2 percent.You purchased the shares one year ago at a price of $31.10 a share.You have received a total of $100 in dividends over the course of the year.What is your capital gains yield on this investment?

A)3.68 percent
B)4.59 percent
C)5.67 percent
D)7.26 percent
E)7.41 percent

Question 69

One year ago, you purchased 150 shares of a stock at a price of $54.18 a share.Today, you sold those shares for $40.25 a share.During the past year, you received total dividends of $182 while inflation averaged 4.2 percent.What is your approximate real rate of return on this investment?

A)-24.20 percent
B)-27.67 percent
C)-20.00 percent
D)20.00 percent
E)24.20 percent

Question 70

Last year, you purchased 500 shares of Analog Devices, Inc.stock for $11.16 a share.You have received a total of $120 in dividends and $7,190 from selling the shares.What is your capital gains yield on this stock?

A)26.70 percent
B)26.73 percent
C)28.85 percent
D)29.13 percent
E)31.02 percent

Question 71

A stock had annual returns of 3.6 percent, -8.7 percent, 5.6 percent, and 12.5 percent over the past four years.Which one of the following best describes the probability that this stock will produce a return of 22 percent or more in a single year?

A)less than 0.1 percent
B)less than 0.5 percent but greater than 0.1 percent
C)less than 1.0 percent but greater the 0.5 percent
D)less than 2.5 percent but greater than 0.5 percent
E)less than 5 percent but greater than 2.5 percent

Question 72

Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent, -9 percent, and 5 percent.What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

A)greater than 0.5 but less than 1.0 percent
B)greater than 1.0 percent but less than 2.5 percent
C)greater than 2.5 percent but less than 16 percent
D)greater than 84 percent but less than 97.5 percent
E)greater than 95 percent

Question 73

One year ago, you purchased 500 shares of Best Wings, Inc.stock at a price of $9.75 a share.The company pays an annual dividend of $0.10 per share.Today, you sold all of your shares for $15.60 a share.What is your total percentage return on this investment?

A)38.46 percent
B)39.10 percent
C)39.72 percent
D)62.50 percent
E)61.03 percent

Question 74

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years.What is the geometric average return for this time period?

A)4.26 percent
B)4.67 percent
C)5.13 percent
D)5.39 percent
E)5.60 percent

Question 75

Last year, you purchased a stock at a price of $47.10 a share.Over the course of the year, you received $2.40 per share in dividends while inflation averaged 3.4 percent.Today, you sold your shares for $49.50 a share.What is your approximate real rate of return on this investment?

A)6.30 percent
B)6.79 percent
C)7.18 percent
D)9.69 percent
E)10.19 percent

Question 76

A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the past four years.The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

A)4.57; 4.75
B)4.75; 4.57
C)6.33; 6.19
D)6.19; 6.33
E)6.33; 6.33

Question 77

A stock had returns of 15 percent, 8 percent, 12 percent, -15 percent, and -4 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?

A)less than 0.5 percent
B)greater than 0.5 percent but less than 1.0 percent
C)greater than 1.0 percent but less than 2.5 percent
D)greater than 2.5 percent but less than 16 percent
E)greater than 16.0 percent

Question 78

A stock had the following prices and dividends.What is the geometric average return on this stock?

A)-15.87 percent
B)-13.71 percent
C)-13.33 percent
D)-12.91 percent
E)-11.48 percent

Question 79

A stock had returns of 11 percent, -18 percent, -21 percent, 20 percent, and 34 percent over the past five years.What is the standard deviation of these returns?

A)18.74 percent
B)20.21 percent
C)20.68 percent
D)24.01 percent
E)23.49 percent

Question 80

The common stock of Air United, Inc., had annual returns of 15.6 percent, 2.4 percent, -11.8 percent, and 32.9 percent over the last four years, respectively.What is the standard deviation of these returns?

A)13.29 percent
B)14.14 percent
C)16.50 percent
D)17.78 percent
E)19.05 percent