Deck 12: Some Lessons from Capital Market History

Question 1

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016?

A) Long-term government bonds
B) Small-company stocks
C) Large-company stocks
D) Long-term corporate bonds
E) U.S. Treasury bills

Answer 1

U.S. Treasury bills

Question 2

For the period 1926-2016, the average risk premium on large-company stocks was about:

A) 12.7 percent.
B) 10.4 percent.
C) 8.6 percent.
D) 6.9 percent.
E) 7.3 percent.

Answer 2

8.6 percent.

Question 3

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) companies whose stock trades OTC.
C) smallest 20 percent of the companies listed on the NYSE.
D) smallest 25 percent of the companies listed on NASDAQ.
E) companies whose stock is listed on NASDAQ.

Answer 3

smallest 20 percent of the companies listed on the NYSE.

Question 4

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

A) 1941-1942
B) 1973-1974
C) 2014-2015
D) 1979-1980
E) 1946-1947

Question 5

Which one of the following earned the highest risk premium over the period 1926-2016?

A) Long-term corporate bonds
B) U.S. Treasury bills
C) Small-company stocks
D) Large-company stocks
E) Long-term government bonds

Question 6

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?

A) Risk premium
B) Geometric average return
C) Arithmetic average return
D) Standard deviation
E) Variance

Question 7

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

Question 8

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 zero.
D) The capital gains yield is expressed as a percentage of a security's total return.
E) The capital gains yield represents the total return earned by an investor.

Question 9

For the period 1926-2016, U.S. Treasury bills always:

A) provided an annual rate of return that exceeded the annual inflation rate.
B) had an annual rate of return in excess of 1.2 percent.
C) provided a positive annual rate of return.
D) earned a higher annual rate of return than long-term government bonds.
E) had a greater variation in returns year-over-year than did long-term government bonds.

Question 10

Which of the following yields on a stock can be negative?

A) Dividend yield
B) Capital gains yield
C) Capital gains yield and total return
D) Dividend yield, capital gains yield, and total return
E) Dividend yield and total return

Question 11

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share 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 par value.
B) The capital gain would have been less had Stacy not received the dividends.
C) The total dollar return per share is $2.85.
D) The capital gains yield is positive.
E) The dividend yield is greater than the capital gains yield.

Question 12

Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016?

A) U.S. Treasury bill returns never exceeded a return of 9 percent in any one year.
B) U.S. Treasury bills had an annual return in excess of 10 percent in three or more years.
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 in at least one year during every decade during the period.

Question 13

The historical record for the period 1926-2016 supports which one of the following statements?

A) When large-company stocks have a negative return, they will have a negative return for at least two consecutive years.
B) The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year.
C) There was only one year during the period when double-digit inflation occurred.
D) Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.
E) The inflation rate was positive each year throughout the period.

Question 14

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 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 $.03 per share.
E) increased by $.03 per share.

Question 15

Which one of the following statements correctly applies to the period 1926-2016?

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

Question 16

Which one of the following categories of securities had the highest average annual return for the period 1926-2016?

A) U.S. Treasury bills
B) Large-company stocks
C) Small-company stocks
D) Long-term corporate bonds
E) Long-term government bonds

Question 17

For the period 2009-2016, U.S. Treasury bills had an annual rate of return that was:

A) between .5 and 1 percent.
B) between 1 and 2 percent.
C) negative in at least one year.
D) negative for two or more years.
E) between 0 and .25 percent.

Question 18

The rate of return on which type of security is normally used as the risk-free rate of return?

A) Long-term Treasury bonds
B) Long-term corporate bonds
C) Treasury bills
D) Intermediate-term Treasury bonds
E) Intermediate-term corporate bonds

Question 19

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) risk-free rate plus the inflation rate.
E) risk-free rate minus the inflation rate.

Question 20

What was the average rate of inflation over the period of 1926-2016?

A) Less than 2.0 percent
B) Between 2.0 and 2.4 percent
C) Between 2.4 and 2.8 percent
D) Between 2.8 and 3.2 percent
E) Greater than 3.2 percent

Question 21

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 22

Which one of the following statements is correct based on the historical record for the period 1926-2016?

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 were less volatile than intermediate-term government bonds.

Question 23

The average annual return on small-company stocks was about ________ percent greater than the average annual return on large-company stocks over the period 1926-2016.

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

Question 24

Based on the period 1926-2016, the actual real return on large-company stocks has been around:

A) 9 percent.
B) 10 percent.
C) 6 percent.
D) 7 percent.
E) 8 percent.

Question 25

Estimates of the rate of return on a security based on the 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 estimate; accurately estimate

Question 26

Which one of the following had the least volatile annual returns over the period of 1926-2016?

A) Large-company stocks
B) Inflation
C) Long-term corporate bonds
D) U.S. Treasury bills
E) Intermediate-term government bonds

Question 27

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 28

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following as related to large-company stocks to occur as a result?

A) Increase in the risk premium
B) Increase in the average long-term rate of return
C) Decrease in the 68 percent probability range of returns
D) Increase in the standard deviation
E) Increase in the geometric average rate of return

Question 29

Generally speaking, which of the following best correspond to a wide frequency distribution?

A) High standard deviation, low rate of return
B) Low rate of return, large risk premium
C) Small risk premium, high rate of return
D) Small risk premium, low standard deviation
E) High standard deviation, large risk premium

Question 30

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 31

Which of the following statements are true based on the historical record for 1926-2016?

A) Risk-free securities produce a positive real rate of return each year.
B) Bonds are generally a safer, or less risky, investment than are stocks.
C) Risk and potential reward are inversely related.
D) The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks.
E) Returns are more predictable over the short term than they are over the long term.

Question 32

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

Question 33

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2016? 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) Long-term government bonds, 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 34

Assume you invest in a portfolio of long-term corporate bonds. Based on the period 1926-2016, what average annual rate of return should you expect to earn?

A) Less than 5 percent
B) Between 5 and 6 percent
C) Between 6 and 7 percent
D) Between 7 and 8 percent
E) More than 8 percent

Question 35

The return earned in an average year over a multiyear period is called the ________ average return.

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

Question 36

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 37

Which one of the following statements is correct based on the period 1926-2016?

A) Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.
B) The standard deviation of the annual rate of inflation was less than 3 percent.
C) U.S Treasury bills have a zero variance in returns because they are risk-free.
D) The risk premium on small-company stocks was less than 10 percent.
E) The risk premium on all U.S. government securities is 0 percent.

Question 38

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 39

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016?

A) Long-term corporate bonds
B) Large-company stocks
C) Intermediate-term government bonds
D) U.S. Treasury bills
E) Small-company stocks

Question 40

The average compound return earned per year over a multiyear period is called the ________ average return.

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

Question 41

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

A) Weak
B) Semiweak
C) Semistrong
D) Strong
E) Perfect

Question 42

One year ago, you purchased a stock at a price of $38.22 a share. Today, you sold the stock and realized a total loss of 11.09 percent on your investment. Your capital gain was -$4.68 a share. What was your dividend yield?

A) 1.15 percent
B) .88 percent
C) 1.02 percent
D) .67 percent
E) .38 percent

Question 43

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

A) Company insiders were aware of the information prior to the announcement.
B) Investors do not pay attention to daily news.
C) Investors tend to overreact.
D) The news was positive.
E) The information was expected.

Question 44

Individual investors who continually monitor the financial markets seeking mispriced securities:

A) earn excess profits on all of their investments.
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

Six months ago, you purchased 300 shares of stock in Global Trading at a price of $26.19 a share. The stock pays a quarterly dividend of $.12 a share. Today, you sold all of your shares for $27.11 per share. What is the total amount of your dividend income on this investment?

A) $36
B) $72
C) $348
D) $144
E) $204

Question 46

You own 850 shares of Western Feed Mills stock valued at $53.15 per share. What is the dividend yield if your total annual dividend income is $1,256?

A) 2.67 percent
B) 2.78 percent
C) 1.83 percent
D) 2.13 percent
E) 2.54 percent

Question 47

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 if the market is efficient.
E) New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market.

Question 48

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 49

West Wind Tours stock is currently selling for $52.30 a share. The stock has a dividend yield of 2.48 percent. How much dividend income will you receive per year if you purchase 600 shares of this stock?

A) $824.96
B) $836.20
C) $724.80
D) $762.00
E) $778.22

Question 50

One year ago, you purchased a stock at a price of $43.20 per share. The stock pays quarterly dividends of $.18 per share. Today, the stock is selling for $45.36 per share. What is your capital gain on this investment?

A) $1.44
B) $2.16
C) $2.80
D) $1.74
E) $2.34

Question 51

Which one of the following statements related to market efficiency tends to be supported by current evidence?

A) It is easy for investors to earn abnormal returns.
B) Short-run price movements are easy to predict.
C) Markets are most likely only weak form efficient.
D) Mispriced stocks are easy to identify.
E) Markets tend to respond quickly to new information.

Question 52

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 53

You just sold 427 shares of stock at a price of $19.07 a share. You purchased the stock for $18.83 a share and have received total dividends of $614. What is the total capital gain on this investment?

A) $716.48
B) $511.52
C) $102.48
D) $618.48
E) $476.52

Question 54

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 55

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) All securities provide the same positive rate of return when the market is efficient.

Question 56

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

A) Riskless market
B) Evenly distributed market
C) Zero volatility market
D) Blume's market
E) Efficient capital market

Question 57

One year ago, you purchased 200 shares of SL Industries stock at a price of $18.97 a share. The stock pays an annual dividend of $1.42 per share. Today, you sold all of your shares for $17.86 per share. What is your total dollar return on this investment?

A) $50
B) $91
C) $58
D) $62
E) $82

Question 58

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 59

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 60

Evidence seems to support the view that studying public information to identify mispriced stocks is:

A) effective as long as the market is only semistrong form efficient.
B) effective provided the market is only weak form efficient.
C) ineffective.
D) effective only in strong form efficient markets.
E) ineffective only in strong form efficient markets.

Question 61

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?

A) 0 percent
B) 2.8 percent
C) .5 percent
D) 1.7 percent
E) 4.3 percent

Question 62

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns?

A) 8.29 percent
B) 9.14 percent
C) 11.54 percent
D) 7.78 percent
E) 10.66 percent

Question 63

Suppose a stock had an initial price of $76 per share, paid a dividend of $1.42 per share during the year, and had an ending share price of $81. What was the capital gains yield?

A) 6.17 percent
B) 6.69 percent
C) 7.05 percent
D) 6.58 percent
E) 5.44 percent

Question 64

Leo purchased a stock for $63.80 a share, received a dividend of $2.68 a share and sold the shares for $59.74 each. During the time he owned the stock, inflation averaged 2.8 percent. What is his approximate real rate of return on this investment?

A) −.64 percent
B) −4.96 percent
C) −2.16 percent
D) 2.16 percent
E) 4.96 percent

Question 65

You bought one of Shark Repellant's 6 percent coupon bonds one year ago for $867. These bonds pay annual payments, have a face value of $1,000, and mature 12 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 7.4 percent. The inflation rate over the past year was 2.9 percent. What was your total real return on this investment?

A) 6.48 percent
B) 6.61 percent
C) 8.18 percent
D) 7.44 percent
E) 9.70 percent

Question 66

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 7 percent, 13 percent, 19 percent, −8 percent, and 15 percent. Suppose the average inflation rate over this time period was 2.6 percent and the average T-bill rate was 3.1 percent. Based on this information, what was the average nominal risk premium?

A) 6.6 percent
B) 6.1 percent
C) 9.2 percent
D) 1.2 percent
E) 3.5 percent

Question 67

Today, you sold 540 shares of stock and realized a total return of 7.3 percent. You purchased the shares one year ago at a price of $24 a share and have received a total of $86 in dividends. What is your capital gains yield on this investment?

A) 5.68 percent
B) 6.64 percent
C) 6.39 percent
D) 7.26 percent
E) 7.41 percent

Question 68

One year ago, you purchased 100 shares of Best Wings stock at a price of $38.19 a share. The company pays an annual dividend of $.46 per share. Today, you sold for the shares for $37.92 a share. What is your total percentage return on this investment?

A) 2.62 percent
B) 1.93 percent
C) 2.72 percent
D) 1.08 percent
E) .50 percent

Question 69

A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 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) −2.4 to 17.5 percent
B) −2.60 to 11.80 percent
C) −12.5 to 26.7 percent
D) −10.4 to 12.3 percent
E) −10.9 to 25.1 percent

Question 70

Aimee is the owner of a stock with annual returns of 17.6 percent, −11.7 percent, 5.6 percent, and 9.7 percent for the past four years. She thinks the stock may achieve a return of 17 percent again this coming year. What is the probability that your friend is correct?

A) Less than .5 percent
B) Greater than .5 percent but less than 1 percent
C) Greater than 1 percent but less than 2.5 percent
D) Greater than 2.5 percent but less than 16 percent
E) Greater than 16 percent

Question 71

Suppose you bought a $1,000 face value bond with a coupon rate of 5.6 percent one year ago. The purchase price was $987.50. You sold the bond today for $994.20. If the inflation rate last year was 2.6 percent, what was your exact real rate of return on this investment?

A) 4.88 percent
B) 5.32 percent
C) 3.65 percent
D) 3.78 percent
E) 4.47 percent

Question 72

A stock had returns of 3 percent, 12 percent, 26 percent, −14 percent, and −1 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) Approximately .1 percent
B) Approximately 5 percent
C) Approximately 2.5 percent
D) Approximately .5 percent
E) Approximately 16 percent

Question 73

Christina purchased 500 shares of stock at a price of $62.30 a share and sold the shares for $64.25 each. She also received $738 in dividends. If the inflation rate was 3.9 percent, what was her exact real rate of return on this investment?

A) 4.20 percent
B) 1.54 percent
C) 1.60 percent
D) 3.95 percent
E) 5.50 percent

Question 74

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year?

A) Less than 2.5 percent but more than .5 percent
B) More than 16 percent
C) Less than .5 percent
D) Less than 1 percent but more than .5 percent
E) Less than 16 percent but more than 2.5 percent

Question 75

You find a certain stock that had returns of 8 percent, −3 percent, 12 percent, and 17 percent for four of the last five years. The average return of the stock for the past five-year period was 6 percent. What is the standard deviation of the stock's returns for the five-year period?

A) 10.39 percent
B) 4.98 percent
C) 7.16 percent
D) 9.25 percent
E) 5.38 percent

Question 76

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 .5 but less than 1.0 percent
B) Greater than 1 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 77

Last year, you purchased 400 shares of Analog stock for $12.92 a share. You have received a total of $136 in dividends and $4,301 in proceeds from selling the shares. What is your capital gains yield on this stock?

A) 9.09 percent
B) 6.73 percent
C) −16.78 percent
D) −14.14 percent
E) −11.02 percent

Question 78

A stock has an expected rate of return of 9.8 percent and a standard deviation of 15.4 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) less than 16 percent
B) less than .5 percent
C) less than 1.0 percent
D) less than 2.5 percent
E) less than 5.0 percent

Question 79

Four months ago, you purchased 900 shares of LBM stock for $7.68 a share. Last month, you received a dividend payment of $.12 a share. Today, you sold the shares for $9.13 a share. What is your total dollar return on this investment?

A) $1,305
B) $1,413
C) $1,512
D) $1,394
E) $1,080

Question 80

A stock had returns of 5 percent, 14 percent, 11 percent, −8 percent, and 6 percent over the past five years. What is the standard deviation of these returns?

A) 7.74 percent
B) 8.21 percent
C) 9.68 percent
D) 8.44 percent
E) 7.49 percent