Question 1

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.

Accepted Answer

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 billsF) D) and E)
G) None of the above C

Question 2

Which one of the following statements best defines the efficient market hypothesis?

Accepted Answer

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.F) C) and E)
G) B) and E)

Question 3

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?

Accepted Answer

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

Question 4

Based on the past 13 years, Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 12.6 percent. The geometric average return for the same period was 11.8 percent. What is the estimated return on this stock for the next three years according to Blume's formula?

Accepted Answer

A)   11.74 percent
B)   11.92 percent
C)   12.13 percent
D)   11.38 percent
E)   12.47 percentF) C) and E)
G) A) and E)

Question 5

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?

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

Which one of the following is defined by its mean and its standard deviation?

Accepted Answer

A)   Arithmetic nominal return
B)   Geometric real return
C)   Normal distribution
D)   Variance
E)   Risk premiumF) A) and B)
G) A) and C)

Question 8

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?

Accepted Answer

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.F) A) and B)
G) A) and C)

Question 9

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?

Accepted Answer

A)   Risk premium
B)   Geometric average return
C)   Arithmetic average return
D)   Standard deviation
E)   VarianceF) A) and B)
G) C) and D)

Question 10

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?

Accepted Answer

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

Question 11

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?

Accepted Answer

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 percentF) D) and E)
G) B) and D)

Question 12

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?

Accepted Answer

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 percentF) C) and D)
G) B) and C)

Question 13

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?

Accepted Answer

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

Question 14

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

Accepted Answer

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.F) B) and D)
G) C) and D)

Question 15

A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7 percent, and 6.3 percent over the last six years. What is the geometric average return on the stock for this period?

Accepted Answer

A)   7.90 percent
B)   7.46 percent
C)   8.56 percent
D)   7.76 percent
E)   8.01 percentF) A) and B)
G) A) and C)

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

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.F) A) and D)
G) A) and E) B

Question 18

Over the past four years a stock had prices of $12.78, $13.34, $16.30, and $15.40, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock?

Accepted Answer

A)   9.87 percent
B)   9.98 percent
C)   9.33 percent
D)   10.91 percent
E)   9.48 percentF) None of the above
G) B) and E)

Question 19

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.

Accepted Answer

A)   overestimate; overestimate
B)   overestimate; underestimate
C)   underestimate; overestimate
D)   underestimate; underestimate
E)   accurately estimate; accurately estimateF) B) and C)
G) C) and D)

Question 20

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

Accepted Answer

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 premiumF) All of the above
G) A) and C)

Exam 12: Some Lessons from Capital Market History

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.

Correct Answer
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C

Which one of the following statements best defines the efficient market hypothesis?

Correct Answer
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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?

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

Correct Answer
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Which one of the following is defined by its mean and its standard deviation?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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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?

Correct Answer
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E

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

Correct Answer
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A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7 percent, and 6.3 percent over the last six years. What is the geometric average return on the stock for this period?

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

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

Correct Answer
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B

Over the past four years a stock had prices of $12.78, $13.34, $16.30, and $15.40, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock?

Correct Answer
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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.

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

Correct Answer
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Exam 12: Some Lessons from Capital Market History

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.

Correct AnswerverifiedC

Which one of the following statements best defines the efficient market hypothesis?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following is defined by its mean and its standard deviation?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedE

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

Correct AnswerverifiedShow Answer

A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7 percent, and 6.3 percent over the last six years. What is the geometric average return on the stock for this period?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedB

Over the past four years a stock had prices of $12.78, $13.34, $16.30, and $15.40, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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C

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E

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B

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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.

Correct Answer
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Correct Answer
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