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

Question 1

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

Answer 1

B

Question 2

Using the following information for an M2 Group Limited share,calculate their expected return and standard deviation.
State Probability Return
Boom 20% 40%
Normal 60% 15%
Recession 20% (20%)

Answer 2

Ki = = (.20)(40%)+ (.60)(15%)+ (.20)(-20%)
= 8% + 9% - 4% = 13%
σi = ( ).
σi = ((40% - 13%)2(.2)+ (15% - 13%)2 (.6)+ (-20% - 13%)2 (.2)).= 19.13%

Question 3

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

Answer 3

True

Question 4

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 5

You purchased a share of ASX Limited at a price of $75.75 one year ago today.If you sell the share today for $89.00 and did not collect a dividend what is your rate of return?

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

Question 6

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

Question 7

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 8

You have invested in a project that has the following cash return schedule: Probability of
Cash Return Occurrence
$40 .15
$50 .20
$60 .30
$70 .30
$80 .05
What is the expected value of the investment's cash return (Round to the nearest $1. )

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

Question 9

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

Question 10

Which of the following sequences 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 11

An emerging market is

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

Question 12

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

Question 13

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 capitalisation.
D)the least sensitivity to inflation.

Question 14

The difference between returns on shares 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 15

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

Question 16

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 17

Burson Group Limited.is selling for $50.00 per share today.In one year,Burson will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Burson share?

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

Question 18

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 19

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 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

Arithmetic average rate of return takes compounding into effect.

Question 25

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 26

Use the following to answer the following question(s).
Roddy Richards invested $12014.88 in Atron Enterprises five years ago.The investment had yearly arithmetic returns of -9.7%,-8.1%,15%,7.2%,and 15.4%.
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 27

How much will Susan's share 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 28

Treasury Notes have less default risk than do Government Bonds.

Question 29

Historically,in Australia shares have had higher returns and greater volatility than have government bonds.

Question 30

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 a CB Australia Limited share,which she purchases for $73,419.66 today.
What is the arithmetic average return on her share if she sells it five years from today?

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

Question 31

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 a CB Australia Limited share,which she purchases for $73,419.66 today.
What is the geometric average return on her share if she sells it five years from today?

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

Question 32

Use the following to answer the following question(s).
Roddy Richards invested $12014.88 in Atron Enterprises five years ago.The investment had yearly arithmetic returns of -9.7%,-8.1%,15%,7.2%,and 15.4%.
What is the arithmetic average return of Roddy Richard's investment?

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

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?

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

Question 34

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

Question 35

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

Question 36

How much money did Roddy Richards receive when he sold his shares of Atron Enterprises?

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

Question 37

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

Question 38

Marcus Berger invested $9842.33 in GB Energy Limited 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

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

Question 40

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

Question 41

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

Question 42

Which of the following is consistent with the 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 43

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

Question 44

Jayden spends a lot of time studying charts of shares past performance,but his investment returns 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 45

Madison was recruited to design and decorate the offices of a large pharmaceutical company.While there,she accidentally read 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

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 46

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

Question 47

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

Question 48

Which of the following would tend to weaken the Semi-Strong Efficient Market Hypothesis?

A)There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the Royal Australian Air Force and the price of Boeing quickly goes up.
B)ACG,Inc.performed well for the past six months;they just lost a major distribution contract,but the price of ACG stock continues to go up with the market.
C)Woolworth announces higher sales turnover this quarter,and the share price remains stable.
D)Every time Muguet Company announces higher than expected earnings the stock continues to drift upward for several weeks.

Question 49

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

Question 50

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

Question 51

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