Deck 10: Some Lessons From Capital Market History

Question 1

When a financial market reflects all the available information in the prices of the
Securities,the market is referred to as a(n):

A)normal distribution
B)primary market
C)efficient capital market
D)delayed reaction market
E)current yield market

Answer 1

efficient capital market

Question 2

The Reserve Bank of Australia expects the inflation rate in Australia to be 4.50% and financial analysts evaluate the risk-premium on small company shares to be 3.70% for the year.The Commonwealth Government's T-notes yield is expected to be 8% for the next year.What rate of return is expected to be earned on small-company stocks over the next year?

A)8.20%
B)4.50%
C)11.20%
D)11.70%
E)12.23%

Answer 2

11.70%

Question 3

If the financial markets are strong-form efficient,then:

A)only the most talented analysts can determine the true value of a security
B)only company insiders have a marketplace advantage
C)technical analysis provides the best tool to use to gain a marketplace advantage
D)no one person has an advantage in the marketplace
E)the only true advantage in the marketplace is having insider information

Answer 3

no one person has an advantage in the marketplace

Question 4

If the securities markets are only weak-form efficient,then the price of a stock will:

A)react to new information over a couple of weeks
B)react slowly to new information concerning the future outlook of the firm
C)tend to overreact to new information concerning the future plans of the firm
D)be based solely on historical information
E)totally reflect the true value of the firm

Question 5

Based on the following stock price data [in $] for Pi-Omega Corporation,calculate the standard deviation of returns on Pi-Omega.

A)0.0294
B)0.4436
C)0.7893
D)0.0462
E)0.0863

Question 6

One of the biggest Australian companies' stock returned 9.37%,-3.55% and 11.55% over the past three years,respectively.What is the arithmetic average return for this period?

A)8.16%
B)5.79%
C)8.68%
D)9.37%
E)4.46%

Question 7

The arithmetic average return of 8,12,2,and 16 per cent is computed as:

A)the square root of (8 + 12 + 2 + 16)
B)the ¼ root of (8 + 12 + 2 + 16)
C)(8 + 12 + 2 + 16) $\times$ 4
D)(8 + 12 + 2 + 16) $\div$ 4
E)(8 + 12 + 2 + 16) $\div$ 2

Question 8

The geometric average return of 8,12,2,and 16 per cent is computed as:

A)(1.08 + 1.12 + 1.02 + 1.16)^1/2 - 1
B)(1.08 + 1.12 + 1.02 + 1.16)^1/4
C)(1.08 $\times$ 1.12 $\times$ 1.0 $\times$ 1.16) $\times$ 4 - 1
D)(1.08 + 1.12 + 1.02 + 1.16) $\times$ 1/2
E)(1.08 $\times$ 1.12 $\times$ 1.02 $\times$ 1.16)^1/4 - 1

Question 9

A 10-year Commonwealth Government bond has an annual average return of 10.60% and a standard deviation of 5.64% (refer to Figure 10.11,p.314).In any one given year,you have a 68% chance that you will not earn more than ____ per cent;and a 95% chance that you will not lose more than____ per cent.

A)21.88;0.68
B)16.24;10.60
C)16.24;0.68
D)4.96;5.64
E)10.60;5.64

Question 10

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

A)mean
B)alpha
C)beta
D)variance
E)standard deviation

Question 11

Which of the following statements are correct?
I.The risk-free rate of return generally earns a risk premium of about one per cent.
II.The reward for bearing risk is called the standard deviation.
III.Based on historical returns,there are rewards for bearing risk.
IV.In general,the higher the risk,the higher the expected return.

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

Question 12

Over the past ten years,large-company stocks have returned 11.2 per cent.The risk premium on these stocks was 4.8 per cent and the inflation rate was 3.7 per cent.What was the risk-free rate of return?

A)2.7 per cent
B)6.4 per cent
C)7.5 per cent
D)8.5 per cent
E)10.1 per cent

Question 13

A year ago,Fred purchased 300 shares of RPJ stock for $14 400.The stock is currently selling for $36 a share and Fred has decided to sell all of his shares.What is the total return that Fred has earned on this investment if he received a special dividend of $5 a share?

A)-25.00 per cent
B)-19.44 per cent
C)-14.58 per cent
D)-8.89 per cent
E)-1.38 per cent

Question 14

Standard deviation is defined as the:

A)average squared difference between the actual return and the average return
B)square root of the average returns
C)mean of the actual returns
D)square root of the mean of the actual returns
E)positive square root of the variance

Question 15

The higher the standard deviation of a security,the _____ the expected rate of return and the _____ the risk.

A)lower;lower
B)lower;higher
C)higher;lower
D)higher;higher
E)more constant;more constant

Question 16

A bond has an average return of 6.8 per cent and a standard deviation of 4.6 per cent.What range of returns would you expect to see 68 per cent of the time?

A)2.2 per cent to 11.4 per cent
B)4.6 per cent to 11.4 per cent
C)4.6 per cent to 22.8 per cent
D)11.4 per cent to 22.8 per cent
E)11.4 per cent to 16.0 per cent

Question 17

The efficient markets hypothesis (EMH):

A)acknowledges that some fairly sizeable inefficiencies will exist even in efficient markets,but only over the long-term
B)argues that markets which fluctuate noticeably from one day to the next cannot be efficient
C)suggests that an efficient market incorporates only about 90 per cent of all public information into the market prices
D)advocates that all investments in an efficient market have a net present value of zero
E)argues that market prices rarely reflect the true value of a security

Question 18

The mean plus or minus twice the standard deviation for a normal distribution provides a probability range of _____ per cent.

A)66
B)68
C)95
D)97
E)99

Question 19

Which one of the following combinations will always result in an increased dividend yield?

A)increase in the stock price combined with a lower dividend amount
B)increase in the stock price combined with a higher dividend amount
C)decrease in the stock price combined with a lower dividend amount
D)decrease in the stock price combined with a higher dividend amount
E)increase in the stock price combined with a constant dividend amount

Question 20

Which one of the following supports the argument that financial markets are semistrong-form efficient?

A)Financial analysts gain a marketplace advantage by studying financial statements.
B)Only company insiders have a marketplace advantage.
C)Only historical information is reflected in the market prices of securities.
D)All information,public and private,is included in current market prices.
E)Technical analysis based on price patterns provides a marketplace advantage.

Question 21

You purchased 1300 shares of LKL stock 5 years ago and have earned annual returns of 7.1 per cent,11.2 per cent,3.6 per cent,-4.7 per cent and 11.8 per cent.What is your arithmetic average return?

A)4.47 per cent
B)5.80 per cent
C)6.23 per cent
D)6.47 per cent
E)6.98 per cent

Question 22

Which one of the following has a rate of return that is used as a proxy for the risk-free rate?

A)long-term government bonds
B)long-term corporate bonds
C)inflation,as measured by the consumer price index
D)treasury notes
E)large-company stocks

Question 23

The variance is the average squared difference between which of the following?

A)actual return and average return
B)actual return and (average return / N - 1)
C)actual return and the real return
D)average return and the standard deviation
E)actual return and the risk-free rate

Question 24

Over the period of 1900-2000,which one of the following investment classes had the highest returns?

A)government bonds
B)cash on hand
C)equities (All Ordinaries Index)
D)inflation
E)30 day bank bills

Question 25

Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

A)arithmetic average return
B)variance
C)standard deviation
D)probability curve
E)normal distribution

Question 26

One year ago,you bought a share for $36.48 a share.You received a dividend of $1.62 per share last month and sold the share today for $40.18 a share.What is the capital gains yield on this investment?

A)2.86 per cent
B)3.70 per cent
C)10.14 per cent
D)12.29 per cent
E)14.58 per cent

Question 27

The standard deviation measures the _____ of a security's returns over time.

A)average value
B)frequency
C)volatility
D)mean
E)arithmetic average

Question 28

Which one of the following statements is correct?

A)The risk-free rate of return has a risk premium of 1.0.
B)The reward for bearing risk is called the standard deviation.
C)Risks and expected return are inversely related.
D)The higher the expected rate of return,the wider the distribution of returns.
E)Risk premiums are inversely related to the standard deviation of returns.

Question 29

The lower the standard deviation of returns on a security,the _____ the expected rate of return and the _____ the risk.

A)lower;lower
B)lower;higher
C)higher;lower
D)higher;higher
E)You cannot determine anything about the expected rate of return from the standard deviation.

Question 30

Your portfolio has provided you with returns of 8.6 per cent,14.2 per cent,-3.7 per cent,and 11.4 per cent over the past four years,respectively.What is the geometric average return for this period?

A)7.25 per cent
B)7.40 per cent
C)7.57 per cent
D)7.63 per cent
E)7.78 per cent

Question 31

Investors require a 4 per cent return on risk-free investments.On a particular risky investment,investors require an excess return of 7 per cent in addition to the risk-free rate of 4 per cent.What is this excess return called?

A)inflation premium
B)required return
C)real return
D)average return
E)risk premium

Question 32

Which one of the following best describes an arithmetic average return?

A)total return divided by N - 1,where N equals the number of individual returns
B)average compound return earned per year over a multi-year period
C)total compound return divided by the number of individual returns
D)return earned in an average year over a multi-year period
E)positive square root of the average compound return

Question 33

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

A)The dollar return is dependent on the size of the investment while the percentage return is not.
B)The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not.
C)The dollar return considers the time value of money while the percentage return does not.
D)Dollar returns are based on capital gains while percentage returns are based on the total rate of return.
E)Dollar returns must either be zero or a positive value while percentage returns can be negative,zero,or positive.

Question 34

One year ago,you purchased 400 shares of stock for $12 a share.The stock pays $0.22 a share in dividends each year.Today,you sold your shares for $28.30 a share.What is your total dollar return on this investment?

A)$6222
B)$6432
C)$6520
D)$6220
E)$6608

Question 35

Home Grown Grains stock returned 28.7 per cent,2.6 per cent,13.1 per cent,and 11.8 per cent over the past four years,respectively.What is the arithmetic average return for this period?

A)14.05 per cent
B)14.62 per cent
C)15.10 per cent
D)15.93 per cent
E)16.01 per cent

Question 36

Assume that large-company stocks had an average return of 11.8 per cent and a standard deviation of 20.7 per cent for a 40-year period.What range of returns would you expect to see on these stocks 95 per cent of the time?

A)-50.3 per cent to 53.2 per cent
B)-50.3 per cent to 73.9 per cent
C)-50.3 per cent to 64.1 per cent
D)-29.6 per cent to 73.9 per cent
E)-29.6 per cent to 53.2 per cent

Question 37

Assume that long-term corporate bonds had an average return of 6.3 per cent and a standard deviation of 8.3 per cent for a 30-year period.What range of returns would you expect to see on these bonds 68 per cent of the time?

A)-2.0 per cent to 14.6 per cent
B)-2.0 per cent to 22.9 per cent
C)-10.3 per cent to 14.6 per cent
D)-10.3 per cent to 17.4 per cent
E)-10.3 per cent to 22.9 per cent

Question 38

Which one of the following is defined as the average compound return earned per year over a multi-year period?

A)geometric average return
B)variance of returns
C)standard deviation of returns
D)arithmetic average return
E)normal distribution of returns

Question 39

Which one of the following is the positive square root of the variance?

A)standard deviation
B)mean
C)risk-free rate
D)average return
E)real return

Question 40

You find a certain share that had returns of 14 per cent,-27 per cent,19 per cent,and 21 per cent for four of the last five years.The average return of the share over this period was 9.5 per cent.What is the standard deviation of the share's returns?

A)11.67 per cent
B)12.90 per cent
C)14.14 per cent
D)18.47 per cent
E)20.59 per cent

Question 41

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

A)current inflation
B)a risk premium
C)available information
D)the historical arithmetic rate of return
E)the historical geometric rate of return

Question 42

If the financial markets are semi-strong form efficient,then:

A)only the most talented analysts can determine the true value of a security
B)only individuals with private information have a marketplace advantage
C)technical analysis provides the best tool to use to gain a marketplace advantage
D)no one individual has an advantage in the marketplace
E)every security offers the same rate of return

Question 43

Which one of the following had the lowest standard deviation of returns for the period of 1985-2009?

A)All Ordinaries Index
B)All Ordinaries Index and ten-year government bonds are the same
C)ten-year government bonds
D)30-day bank bills
E)30-day bank bills and ten-year government bonds are the same

Question 44

What was the average risk premium on Australian government bonds for the period 1985-2009?

A)5.3%
B)0.0%
C)9.7%
D)1.7%
E)8.0%

Question 45

Which one of the following is the hypothesis that securities markets are efficient?

A)geometric market hypothesis
B)standard deviation hypothesis
C)efficient markets hypothesis
D)capital market hypothesis
E)financial markets hypothesis

Question 46

If the financial markets are efficient then:

A)stock prices should remain constant
B)stock prices should increase or decrease slowly as new events are analysed and the information is absorbed by the markets
C)an increase in the value of one security should be offset by a decrease in the value of another security
D)stock prices will only change when an event actually occurs,not at the time the event is anticipated
E)stock prices should only respond to unexpected news and events

Question 47

The historical returns on equities as reported in your textbook in section 10.2 are based on the:

A)10-year government bonds
B)a portfolio of 30-day bank bills
C)the All Ordinaries Index
D)the ASX 200
E)the Dow Jones index

Question 48

Assume the securities markets are strong-form efficient.Given this assumption,you should expect which one of the following to occur?

A)The risk premium on any security in that market will be zero.
B)The price of any one security in that market will remain constant at its current level.
C)Each security in the market will have an annual rate of return equal to the risk-free rate.
D)The price of each security in that market will frequently fluctuate.
E)The prices of each security will fall to zero because the net present value of the investments will be zero.

Question 49

A mining share for a company listed on the ASX produced returns of 19 per cent,27 per cent,and -38 per cent over three of the past four years.The arithmetic average for the past four years is 7 per cent.What is the standard deviation of the stock's returns for the four-year period?

A)11.63 per cent
B)15.94 per cent
C)19.70 per cent
D)26.25 per cent
E)30.21 per cent

Question 50

You have observed the returns for an investment in Telstra shares for the last five years.This shows returns of 23 per cent,-17 per cent,8 per cent,22 per cent,and 3 per cent.The stock has an average return of ______ per cent and a standard deviation of _____ per cent.

A)7.80;13.54
B)7.80;14.63
C)7.80;16.36
D)14.60;14.63
E)14.60;16.36