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

Question 1

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?

A)15.0%
B)11.7%
C)14.5%
D)25.0%

Answer 1

C

Question 2

What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.

A)3.68%
B)1.23%
C)8.47%
D)6.66%

Answer 2

A

Question 3

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.

Answer 3

False

Question 4

Investments that have earned the highest rates of return over time also have

A)the lowest risk.
B)the highest standard deviation of returns.
C)the largest market capitalization.
D)the least sensitivity to inflation.

Question 5

An emerging market is

A)a market for small,but rapidly growing companies.
B)market for companies coming out from bankruptcy proceedings.
C)market for promising,but untested technologies.
D)a market located in an economy with low to middle per capita income.

Question 6

The expected rate of return is the sum of each possible return times it likelihood of occurrence.

Question 7

Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.

Question 8

Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?

A)$51.00
B)$1.00
C)$2.00
D)$3.00

Question 9

Which of the following sequences is arranged in the correct order,from highest long-term returns to lowest?

A)Small stocks,government bonds,large stocks
B)Large stocks,treasury bills,small stocks
C)Small stocks,large stocks,treasury bills
D)Government bonds,large stocks,treasury bills

Question 10

Using the following information for McDonovan,Inc.'s stock,calculate their expected return and standard deviation.
State Probability Return
Boom 20% 40%
Normal 60% 15%
Recession 20% (20%)

Question 11

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

A)Expected return
B)The standard deviation
C)The probability distribution
D)The cash return

Question 12

The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.

Question 13

The cash return on an investment is calculated as purchase price-selling price.

Question 14

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?

A)12%
B)13%
C)14%
D)15%

Question 15

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

Question 16

The difference between returns on stocks and government bonds is known as

A)the equity risk premium.
B)the risk and return tradeoff.
C)the maturity premium.
D)the risk/reward paradox.

Question 17

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your rate of return?

A)35.00%
B)12.50%
C)17.50%
D)25.00%

Question 18

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

Question 19

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. )

A)$60
B)$65
C)$58
D)$70

Question 20

You are considering investing in a project with the following possible outcomes:
Probability of Investment
States Occurrence Returns
State 1: Economic boom 15% 16%
State 2: Economic growth 45% 12%
State 3: Economic decline 25% 5%
State 4: Depression 15% -5%
Calculate the expected rate of return for this investment.

A)9.8%
B)7.0%
C)8.3%
D)6.3%

Question 21

Investments in emerging markets have higher volatility than do U.S.Stocks.

Question 22

Michael Lynch invested $10,000 in the Rearguard Fund four years ago.All earnings were reinvested in the fund.If his compound annual rate of return was 7%,what is his investment worth today?

A)$1,310.80
B)$10,700
C)$12,800
D)$762.89

Question 23

Arithmetic average rate of return takes compounding into effect.

Question 24

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

Question 25

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

Question 26

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

Question 27

Use the following information to answer the following question(s).
Susan Bright will get returns of 18%,-20.3%,-14%,17.6%,and 8.3% in the next five years on her investment in CoffeeTown,Inc.stock,which she purchases for $73,419.66 today.
What is the geometric average return on her stock if she sells it five years from today?

A)-2.33%
B).59%
C)3.67%
D)4.88%

Question 28

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

A)2.42%
B)3.96%
C)5.18%
D)15.1%

Question 29

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

A)2.98%
B)3.73%
C)3.95%
D)There is insufficient information to derive an answer.

Question 30

Riskier investments have traditionally had lower returns than less risky investments have had.

Question 31

Investors are always rewarded for taking higher risk with higher realized returns.

Question 32

How much money did Roddy Richards receive when he sold his shares of W.M.D.?

A)$12,014.88
B)$12,398.42
C)$13,663.47
D)$14,184.73

Question 33

How much will Susan's stock be worth if she sells it five years from today?

A)$71,423.85
B)$73,419.66
C)$75,628.75
D)$80,333.40

Question 34

Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.

Question 35

During the financial crisis of 2007-2009,returns on real estate investment trusts (REITS)and stocks moved in opposite directions.

Question 36

Treasury Bills have less default risk than do Government Bonds.

Question 37

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

A)3.38%
B)4.63%
C)6.96%
D)8.78%

Question 38

Use the following information to answer the following question(s).
Susan Bright will get returns of 18%,-20.3%,-14%,17.6%,and 8.3% in the next five years on her investment in CoffeeTown,Inc.stock,which she purchases for $73,419.66 today.
What is the arithmetic average return on her stock if she sells it five years from today?

A)1.92%
B)3.98%
C)6.47%
D)7.11%

Question 39

If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.

Question 40

Risky investments have the potential for higher returns,but also larger losses.

Question 41

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

Question 42

Madison was hired to design and decorate the offices of a large pharmaceutical company.She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration.She immediately bought the company's stock which doubled in price over the following week.This outcome is inconsistent with

A)the weak-form efficient market hypothesis.
B)the semi-strong form efficient market hypothesis.
C)the strong form efficient market hypothesis.Her action was probably illegal.
D)all of the above.

Question 43

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

Question 44

Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.

Question 45

Under the efficient market hypothesis,would securities be properly priced.

Question 46

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

Question 47

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

Question 48

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

A)the weak-form efficient market hypothesis.
B)the semi-strong form efficient market hypothesis.
C)the strong form efficient market hypothesis.
D)all of the above.

Question 49

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

Question 50

Which of the following is consistent with the efficient market hypothesis?

A)so-called value stocks outperform growth stocks.
B)stocks that have performed well over the past year continue to perform well for several more months.
C)a company announces higher than expected sales and earnings.The stock price immediately increases by 10%.
D)a company announces higher than expected sales and earnings.The stock price remains unchanged.

Question 51

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT

A)There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S.Government and the price of Boeing quickly goes up.
B)ACG,Inc.performed well for the past six months,but they just lost a major distribution contract,but the price of ACG stock continues to go up.
C)Louisville Slugger,Inc. ,gets a contract to supply bats for Little League play,a contract it never had before,and stock price remains stable.
D)Muguet Company consistently underperforms the market in October,but outperforms the market in May.