Deck 7: Risk and Returnan Introduction: History of Financial Market Returns

Question 1

Investments that have earned the highest rates of return over 1995-2015 also have [blank].

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

Answer 1

B

Question 2

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

Answer 2

False

Question 3

Spartan Furniture Pty Ltd 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 shares?

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

Answer 3

B

Question 4

Over the period 1995-2015, which pair of investments does not perfectly fit the 'higher risk, higher return' pattern?

A)Government bonds, Treasury bills
B)US equities, corporate bonds
C)US equities, international equities
D)Corporate bonds, international equities

Question 5

Using the following information for Graphics Ltd shares, calculate their expected return and standard deviation.

Question 6

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%

Question 7

Over the period 1995-2015, the risk-return relationship appears to be [blank].

A)A)negative.
B)B)perfectly positive.
C)C)random.
D)D)generally positive, but not perfect.

Question 8

Investment variances may be either positive or negative.

Question 9

You purchased shares of Global Security at a price of $75.75 one-year ago today.If you sell the shares today for $89.00, what is your rate of return?

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

Question 10

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.

Question 11

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 12

You are considering investing in a project with the following possible outcomes: Calculate the expected rate of return for this investment.

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

Question 13

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 14

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%

Question 15

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

Question 16

The difference between returns on shares and government bonds is known as [blank].

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

Question 17

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

Question 18

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

Question 19

You have invested in a project that has the following payoff schedule: 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

Which sequence is arranged in the correct order, from highest expected long-term returns to lowest?
A.Small shares, government bonds, large shares
B.Large shares, Treasury notes, small shares
C.Small shares, large shares, Treasury notes
D.Government bonds, large shares, Treasury notes

Question 21

What is the arithmetic average return of Kamal's investment?

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

Question 22

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

A)False

Question 23

The arithmetic average rate of return takes compounding into effect.

Question 24

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

Question 25

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

Question 26

Historically, including international shares in one's portfolio increases the portfolio's risk.

Question 27

What is the geometric average return on Susan's shares if she sells it five years from today?

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

Question 28

Investments in emerging markets have higher volatility than do Australian shares.

Question 29

Treasury notes have less default risk than do government bonds.

Question 30

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

Question 31

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

Question 32

An emerging market is [blank].

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 33

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 (round to the nearest dollar)?

A)$13,108
B)$10,700
C)$12,800
D)$763

Question 34

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

Question 35

The variation in rates of return earned over a period of time is known as the investment's [blank].

Question 36

How much will Susan's shares 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 37

What is the arithmetic average return on Susan's shares if she sells it five years from today?

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

Question 38

Marcus Berger invested $9842.33 in Hawkeye Hats Ltd four years ago.He sold the shares 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 39

How much money did Kamal receive when he sold his shares of Oceanic Electric?

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

Question 40

What is the geometric average return of Kamal's investment?

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

Question 41

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

Question 42

If markets are efficient, share prices go up when there is positive information about a company, and go down when there is negative information about the company.

Question 43

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

Question 44

Work by the behavioural economists Robert Shiller and Daniel Kahnemann strongly supports the weak and semi-strong forms of the Efficient Market Hypothesis.

Question 45

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

Question 46

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

Question 47

Madison's sister, Amanda, works at a large pharmaceutical company.While visiting Amanda at work, Madison glanced at a report indicating that a new drug had just been approved by the Therapeutic Goods Administration.She immediately bought some of the company's shares, which doubled in price over the following week.This outcome is inconsistent with the [blank] market hypothesis.

Question 48

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

Question 49

Identify the three anomalies to the efficient markets hypothesis.

Question 50

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

A)So-called value shares outperform growth shares.
B)Shares 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 share price immediately increases by 10%.
D)A company announces higher than expected sales and earnings.The share price remains unchanged.

Question 51

The traditional view of markets assumes that investors are [blank].

A)overconfident
B)rational
C)unreasonable
D)sensitive

Question 52

Each of the following would tend to weaken the semi-strong form Efficient Market Hypothesis except

A)There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the US 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 shares continues to go up.
C)Woolworth announces higher sales turnover this quarter, and the share price remains stable.
D)Muguet Company consistently underperforms the market in October, but outperforms the market in May.

Question 53

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

Question 54

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

Question 55

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.

Question 56

The favourable returns of shares in Australia over the past 100 years is partly explained by the concept that share prices [blank] when there is [blank] news about future profits.

A)stagnate; good
B)rapidly decrease; good
C)slightly increase; bad
D)go up; good