Deck 10: Some Lessons From Capital Market History

Question 1

Over the period of 1926-2011:

A)the risk premium on large-company stocks was greater than the risk premium on small- company stocks.
B)U.S. Treasury bills had a risk premium that was just slightly over 2 percent.
C)the risk premium on long-term government bonds was zero percent.
D)the risk premium on stocks exceeded the risk premium on bonds.
E)U. S. Treasury bills had a negative risk premium.

Answer 1

the risk premium on stocks exceeded the risk premium on bonds.

Question 2

The historical returns on large-company stocks,as reported by Ibbotson and Sinquefield and reported in your textbook,are based on the:

A)largest 20 percent of the stocks traded on the NYSE.
B)stock returns for the largest 10 percent of the publicly traded firms in the U.S.
C)returns of the 100 largest firms in the U.S.
D)returns of all the stocks listed on the NYSE.
E)stocks of the 500 companies included in the S&P 500 index.

Answer 2

stocks of the 500 companies included in the S&P 500 index.

Question 3

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

Answer 3

Actual return and average return

Question 4

Which one of the following could cause the total return on an investment to be a negative rate?

A)Constant annual dividend amount
B)Increase in the annual dividend amount
C)Stock price that remains constant over the investment period
D)Stock price that declines over the investment period
E)Stock price that increases over the investment period

Question 5

One year ago,you purchased 100 shares of a stock.This morning you sold those shares and realized a total return of 8.2 percent.Given this information,you know for sure the:

A)stock price increased by 8.2 percent over the last year.
B)stock increased in value over the past year.
C)stock paid a dividend.
D)dividend yield is greater than zero.
E)sum of the dividend yield and the capital gains yield is 8.2 percent.

Question 6

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

A)Geometric average return
B)Variance of returns
C)Standard deviation of returns
D)Arithmetic average return
E)Normal distribution of returns

Question 7

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 multiyear period
C)Total compound return divided by the number of individual returns
D)Return earned in an average year over a multiyear period
E)Positive square root of the average compound return

Question 8

Over the period of 1926-2011:

A)long-term government bonds underperformed long-term corporate bonds.
B)small-company stocks underperformed large-company stocks.
C)inflation exceeded the rate of return on U.S. Treasury bills.
D)U.S. Treasury bills outperformed long-term government bonds.
E)large-company stocks outperformed all other investment categories.

Question 9

Which one of the following had the lowest standard deviation of returns for the period of 1926-2011?

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

Question 10

The rate of return on which one of the following is used as the risk-free rate?

A)Long-term government bonds
B)Long-term corporate bonds
C)Inflation, as measured by the Consumer Price Index
D)U.S. Treasury bill
E)Large-company stocks

Question 11

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 12

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

A)Inflation premium
B)Required return
C)Real return
D)Average return
E)Risk premium

Question 13

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 14

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 15

Percentage returns:
I.are easy to understand.
II.relay information about a security more easily than dollar returns do.
III.are not affected by the amount of the investment.
IV.can be easily separated into dividend yield and capital gain yield.

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

Question 16

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 17

Over the period of 1926-2011,which one of the following investment classes had the highest volatility of returns?

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

Question 18

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 19

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 20

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2011?

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

Question 21

Dan is a chemist for ABC,a major drug manufacturer.Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are:

A)weak form efficient.
B)strong form efficient.
C)semistrong form efficient.
D)efficient at any level.
E)aware that the trader is an insider.

Question 22

Based on the period 1926-2011,what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

A)Between 0 and 1 percent
B)Between 1 and 2 percent
C)Between 2 and 3 percent
D)Between 3 and 4 percent
E)Between 4 and 5 percent

Question 23

The average risk premium on long-term government bonds for the period 1926-2011 was equal to:

A)zero.
B)1 percent.
C)the rate of return on the bonds plus the corporate bond rate.
D)the rate of return on the bonds minus the T-bill rate.
E)the rate of return on the bonds minus the inflation rate.

Question 24

Semistrong form market efficiency states that the value of a security is based on:

A)all public and private information.
B)historical information only.
C)all publicly available information.
D)all publicly available information plus any data that can be gathered from insider trading.
E)random information with no clear distinction as to the source of that information.

Question 25

When,if ever,will the geometric average return exceed the arithmetic average return for a given set of returns?

A)When the set of returns includes only risk-free rates.
B)When the set of returns has a wide frequency distribution.
C)When the set of returns has a very narrow frequency distribution.
D)When all of the rates of return in the set of returns are equal to each other.
E)Never

Question 26

What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?

A)0.05 percent
B)0.5 percent
C)1.0 percent
D)2.5 percent
E)5.0 percent

Question 27

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 28

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses.This news is totally unexpected and viewed as a major medical advancement.Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

A)The price of New Labs stock remains unchanged.
B)The price of New Labs stock increases rapidly and then settles back to its pre-announcement level.
C)The price of New Labs stock increases rapidly to a higher price and then remains at that price.
D)All stocks quickly increase in value and then all but New Labs stock fall back to their original values.
E)The value of all stocks suddenly increase and then level off at their higher values.

Question 29

For the period 1926-2011,which one of the following had the smallest risk premium?

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

Question 30

According to the efficient markets hypothesis,professional investors will earn:

A)excess profits over the long-term.
B)excess profits, but only on short-term investments.
C)a dollar return equal to the value paid for an investment.
D)a return that cannot be accurately predicted because investments are subject to the random movements of the markets.
E)a return that "beats the market."

Question 31

Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2011?

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

Question 32

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 33

Which one of the following has the narrowest distribution of returns for the period 1926-2011?

A)Long-term corporate bonds
B)Long-term government bonds
C)Intermediate-terms government bonds
D)Large-company stocks
E)Small-company stocks

Question 34

Which one of the following statements is true regarding the period 1926-2011?

A)The returns on small-company stocks were less volatile than the returns on large-company stocks.
B)The risk-free rate of return remained constant over the time period.
C)U.S. Treasury bills had a positive average real rate of return.
D)Bonds had an average rate of return that exceeded the average return on stocks.
E)The inflation rate was just as volatile as the return on long-term bonds.

Question 35

What was the average annual risk premium on small-company stocks for the period 1926-2011?

A)5.3 percent
B)6.2 percent
C)8.5 percent
D)12.9 percent
E)15.3 percent

Question 36

The period 1926-2011 illustrates that U.S.Treasury bills:

A)outperform inflation by approximately 1 percent every year.
B)have a zero standard deviation.
C)can either outperform or underperform inflation on an annual basis.
D)produce a rate of return roughly equivalent to the rate of return on long-term government bonds.
E)routinely have negative annual returns.

Question 37

The historical record for the period 1926-2011 shows that the annual nominal rate of return on:

A)risk-free securities has averaged around 5 percent.
B)the Consumer Price Index has been positive every year.
C)U.S. Treasury bills have had a positive rate of return for every year in the period.
D)U.S. Treasury bills is constant.
E)large company stocks has averaged around 9 percent.

Question 38

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 39

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 analyzed 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 change only when an event actually occurs, not at the time the event is anticipated.
E)stock prices should respond only to unexpected news and events.

Question 40

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 41

Windsor stock has produced returns of 22.6 percent,18.7 percent,11.3 percent,-19.8 percent,and 2.4 percent over the past five years,respectively.What is the variance of these returns?

A)0.028453
B)0.031947
C)0.035682
D)0.039515
E)0.040016

Question 42

The Bermuda Triangle Store pays a constant dividend.Last year,the dividend yield was 5.4 percent when the stock was selling for $15 a share.What must the stock price be today if the market currently requires a 3.8 percent dividend yield on this stock?

A)$21.32
B)$12.30
C)$11.59
D)$19.22
E)$22.48

Question 43

Assume large-company stocks returned 12.8 percent on average over the past 75 years.The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6 percent.What was the average nominal risk-free rate of return for those 75 years?

A)4.90 percent
B)9.20 percent
C)4.26 percent
D)8.33 percent
E)8.60 percent

Question 44

Hercules Movers pays a constant annual dividend of $1.75 per share on its stock.Last year at this time,the market rate of return on this stock was 14.8 percent.Today,the market rate has fallen to 11.2 percent.What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

A)18.78 percent
B)22.03 percent
C)28.16 percent
D)30.00 percent
E)32.14 percent

Question 45

Rocky Top pays a constant annual dividend.One year ago,when you purchased shares of that stock at $12 a share,the dividend yield was 2 percent.Over this past year,the inflation rate has been 2.6 percent.Today,the required return on this stock is 9 percent and you just sold all of your shares.What is your total nominal return on this investment? Round your answer to the nearest whole percentage.

A)-77 percent
B)-75 percent
C)-76 percent
D)70 percent
E)76 percent

Question 46

Sarah earned a 2.9 percent real rate of return on her investments for the past year.During that time,the risk-free rate was 4.1 percent and the inflation rate was 3.6 percent.What was her nominal rate of return?

A)5.30 percent
B)6.06 percent
C)6.60 percent
D)6.67 percent
E)6.91 percent

Question 47

One year ago,you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par.Today,you sold this bond for 99.8 percent of par.What is your total dollar return on this investment?

A)$36
B)$60
C)$64
D)$74
E)$82

Question 48

One year ago,you purchased 500 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)$6,222
B)$7,432
C)$8,150
D)$7,775
E)$8,260

Question 49

One year ago,Peyton purchased 3,600 shares of Broncos stock for $101,124.Today,he sold those shares for $26.60 a share.What is the total return on this investment if the dividend yield is 1.9 percent?

A)-3.98 percent
B)-3.40 percent
C)-2.29 percent
D)1.10 percent
E)3.40 percent

Question 50

Over the past five years,a stock returned 8.3 percent,-32.5 percent,-2.2 percent,46.9 percent,and 11.8 percent,respectively.What is the variance of these returns?

A)0.071188
B)0.076290
C)0.081504
D)0.082547
E)0.091306

Question 51

You earned 26.3 percent on your investments for a time period when the risk-free rate was 3.8 percent and the inflation rate was 4.0 percent.What was your real rate of return for the period?

A)19.12 percent
B)20.06 percent
C)21.44 percent
D)21.67 percent
E)21.08 percent

Question 52

Last year,Paul invested $38,000 in Oil Town stock,$11,000 in long-term government bonds,and $8,000 in U.S.Treasury bills.Over the course of the year,he earned returns of 12.1 percent,7.2 percent,and 4.1 percent,respectively.What was the nominal risk premium on Oil Town's stock for the year?

A)2.1 percent
B)4.9 percent
C)6.0 percent
D)7.8 percent
E)8.0 percent

Question 53

The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1 percent.The firm pays constant annual dividends.What is the amount of the next dividend per share?

A)$0.021
B)$0.210
C)$0.840
D)$0.871
E)$0.875

Question 54

If the financial markets are semistrong 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 55

One year ago,Debra purchased 4,200 shares of KNF stock for $177,072.Today,she sold those shares for $48.10 a share.What is the capital gains yield on this investment if the dividend yield is 4.1 percent?

A)10.79 percent
B)11.23 percent
C)13.07 percent
D)15.04 percent
E)14.53 percent

Question 56

Cox Footwear pays a constant annual dividend.Last year,the dividend yield was 2.5 percent when the stock was selling for $26 a share.What is the current price of the stock if the current dividend yield is 3.1 percent?

A)$18.92
B)$20.97
C)$25.20
D)$26.87
E)$27.40

Question 57

One year ago,you bought a stock for $36.48 a share.You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share.What is the capital gains yield on this investment?

A)2.86 percent
B)4.70 percent
C)12.88 percent
D)15.62 percent
E)18.53 percent

Question 58

Last year,Isaac earned 10.6 percent on her investments while U.S.Treasury bills yielded 3.8 percent and the inflation rate was 3.1 percent.What real rate of return did she earn on her investments last year?

A)6.63 percent
B)7.27 percent
C)8.56 percent
D)9.24 percent
E)10.39 percent

Question 59

One year ago,LaTresa purchased 600 shares of Outland Co.stock for $3,600.The stock does not pay any regular dividends but it did pay a special dividend of $0.30 a share last week.This morning,she sold her shares for $7.25 a share.What was the total return on this investment?

A)18.00 percent
B)20.83 percent
C)22.50 percent
D)25.83 percent
E)28.24 percent

Question 60

You expect the inflation rate to be 3.8 percent and the U.S.Treasury bill yield to be 3.9 percent for the next year.The risk premium on small-company stocks is 12.6 percent.What nominal rate of return do you expect to earn on small-company stocks next year?

A)15.5 percent
B)16.5 percent
C)16.8 percent
D)9.2 percent
E)8.8 percent

Question 61

A stock has an average return of 19.2 percent and a standard deviation of 10.7 percent.In any one given year,you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent if you invest in this security.

A)-2.2; 38.2
B)-2.2; 40.6
C)-13.9; 28.9
D)-13.9; 39.6
E)-13.9; 50.3

Question 62

A stock has produced returns of 11 percent,18 percent,-6 percent,-13 percent,and 21 percent for the past five years,respectively.What is the standard deviation of these returns?

A)7.75 percent
B)8.87 percent
C)9.23 percent
D)14.99 percent
E)16.64 percent

Question 63

Over the past six years,a stock had annual returns of 14 percent,-3 percent,8 percent,21 percent,-16 percent,and 4 percent,respectively.What is the standard deviation of these returns?

A)11.27 percent
B)13.05 percent
C)13.59 percent
D)15.08 percent
E)14.40 percent

Question 64

A security produced returns of 13 percent,18 percent,9 percent,23 percent,and -17 percent over the past five years,respectively.Based on these five years,what is the probability that this stock will earn more than 24.76 percent in any one given year?

A)0.5 percent
B)1.0 percent
C)2.5 percent
D)5.0 percent
E)16.0 percent

Question 65

Over the past four years,large-company stocks and U.S.Treasury bills have produced the returns stated below.During this period,inflation averaged 2.8 percent.Given this information,the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills.

A)6.47; 0.92
B)6.47; 1.08
C)7.98; 0.92
D)7.98; 1.08
E)7.98; 1.22

Question 66

You purchased 1,500 shares of KFC stock five years ago and have earned annual returns of 7.1 percent,11.2 percent,5.25 percent,-4.7 percent,and 11.8 percent,respectively.What is your arithmetic average return?

A)4.47 percent
B)6.13 percent
C)6.23 percent
D)6.47 percent
E)8.01 percent

Question 67

Over the past four years,a stock produced returns of 15 percent,6 percent,11 percent,and 22 percent,respectively.Based on these four years,what range of returns would you expect to see 95 percent of the time?

A)-6.58 percent to 31.33 percent
B)-6.58 percent to 27.02 percent
C)-6.58 percent to 24.39 percent
D)-0.02 percent to 24.39 percent
E)-0.02 percent to 27.02 percent

Question 68

A stock produced returns of 16 percent,9 percent,and 21 percent over three of the past four years,respectively.The arithmetic average for the past four years is 10 percent.What is the standard deviation of the stock's returns for the four-year period?

A)6.82 percent
B)8.54 percent
C)9.09 percent
D)10.83 percent
E)11.75 percent

Question 69

A security produced returns of 12 percent,-11 percent,-2 percent,15 percent,and 9 percent over the past five years,respectively.Based on these five years,what is the probability that an investor in this stock will lose more than 17.06 percent in any one given year?

A)0.50 percent
B)1.00 percent
C)1.25 percent
D)2.50 percent
E)5.00 percent

Question 70

Home Grown Tomatoes stock returned 28.7 percent,2.6 percent,13.1 percent,12.2,and 11.8 percent over the past five years,respectively.What is the arithmetic average return for this period?

A)13.68 percent
B)14.62 percent
C)15.10 percent
D)15.93 percent
E)17.10 percent

Question 71

A stock produced returns of 19 percent,27 percent,and -38 percent over three of the past four years,respectively.The arithmetic average for the past four years is 7 percent.What is the standard deviation of the stock's returns for the four-year period?

A)11.63 percent
B)15.94 percent
C)19.70 percent
D)26.25 percent
E)30.21 percent

Question 72

Your portfolio has provided you with returns of 8.6 percent,14.2 percent,-3.7 percent,and 12.0 percent over the past four years,respectively.What is the geometric average return for this period?

A)7.25 percent
B)7.54 percent
C)7.57 percent
D)7.63 percent
E)9.55 percent

Question 73

The common stock of Hillshire Farms has yielded 16.3 percent,7.2 percent,11.8 percent,-3.6 percent,and 9.7 percent over the past five years,respectively.What is the geometric average return?

A)7.91 percent
B)8.03 percent
C)8.07 percent
D)8.27 percent
E)9.64 percent

Question 74

A bond has an average return of 6.3 percent and a standard deviation of 3.8 percent.What range of returns would you expect to see 68 percent of the time on this security?

A)-1.30 percent to 13.9 percent
B)-1.30 percent to 10.1 percent
C)2.5 percent to 7.8 percent
D)2.5 percent to 10.1 percent
E)2.5 percent t0 13.9 percent

Question 75

Kelly decided to accept the risk and purchased a high growth stock.Her returns for the past five years are 48 percent,39 percent,-56 percent,61 percent,and -24 percent,respectively.What is the standard deviation of these returns?

A)43.20 percent
B)45.46 percent
C)47.88 percent
D)50.83 percent
E)58.39 percent

Question 76

A stock has yielded returns of 6 percent,11 percent,14 percent,and -2 percent over the past four years,respectively.What is the standard deviation of these returns?

A)5.52 percent
B)5.86 percent
C)6.05 percent
D)6.47 percent
E)6.99 percent

Question 77

Over the last four years,the common stock of Plymouth Shippers has had an arithmetic average return of 9.3 percent.Three of those four years produced returns of 14.1 percent,15.6 percent,and 3.4 percent,respectively.What is the geometric average return for this four-year period?

A)7.72 percent
B)8.41 percent
C)8.93 percent
D)9.16 percent
E)9.368 percent

Question 78

Over the past four years,a stock produced returns of 23 percent,-39 percent,4 percent,and 16 percent,respectively.Based on these four years,what range of returns would you expect to see 99 percent of the time?

A)-82.39 percent to 84.39 percent
B)-82.39 percent to 86.41 percent
C)-82.39 percent to 88.56 percent
D)-78.46 percent to 86.41 percent
E)-78.46 percent to 84.39 percent

Question 79

Five years ago,you purchased 600 shares of stock.The annual returns have been 7.2 percent,-19.4 percent,3.8 percent,14.2 percent,and 27.9 percent,respectively.What is the variance of these returns?

A)0.029889
B)0.030021
C)0.030068
D)0.030133
E)0.030284

Question 80

A stock has produced returns of 16.6 percent,3.4 percent,11.7 percent,and -9.2 percent over the past four years,respectively.What is the geometric average return?

A)5.16 percent
B)5.47 percent
C)6.23 percent
D)6.61 percent
E)10.12 percent