Chap 012

Chapter 12 - Some Lessons from Capital Market History
Chapter 12 Some Lessons from Capital Market History

Multiple Choice Questions
1. Last year, T-bills returned 2 percent hile your in!estment in lar"e-company stocks earned an a!era"e of # percent. $hich one of the follo in" terms refers to the difference bet een these t o rates of return% &. risk premium '. "eometric return C. arithmetic (. standard de!iation ). !ariance
2. $hich one of the follo in" best defines the !ariance of an in!estment*s annual returns o!er a number of years% &. The a!era"e s+uared difference bet een the arithmetic and the "eometric a!era"e annual returns. '. The s+uared summation of the differences bet een the actual returns and the a!era"e "eometric return. C. The a!era"e difference bet een the annual returns and the a!era"e return for the period. (. The difference bet een the arithmetic a!era"e and the "eometric a!era"e return for the period. ). The a!era"e s+uared difference bet een the actual returns and the arithmetic a!era"e return.
,. Standard de!iation is a measure of hich one of the follo in"% &. a!era"e rate of return '. !olatility C. probability (. risk premium ). real returns
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-. $hich one of the follo in" is defined by its mean and its standard de!iation% &. arithmetic nominal return '. "eometric real return C. normal distribution (. !ariance ). risk premium
#. The a!era"e compound return earned per year o!er a multi-year period is called the ..... a!era"e return. &. arithmetic '. standard C. !ariant (. "eometric ). real
/. The return earned in an a!era"e year o!er a multi-year period is called the ..... a!era"e return. &. arithmetic '. standard C. !ariant (. "eometric ). real
0. &ssume that the market prices of the securities that trade in a particular market fairly reflect the a!ailable information related to those securities. $hich one of the follo in" terms best defines that market% &. riskless market '. e!enly distributed market C. 1ero !olatility market (. 'lume*s market ). efficient capital market
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2. $hich one of the follo in" statements best defines the efficient market hypothesis% &. )fficient markets limit competition. '. Security prices in efficient markets remain steady as ne information becomes a!ailable. C. Mispriced securities are common in efficient markets. (. &ll securities in an efficient market are 1ero net present !alue in!estments. ). 3rofits are remo!ed as a market incenti!e hen markets become efficient.
4. Stacy purchased a stock last year and sold it today for 5, a share more than her purchase price. She recei!ed a total of 56.0# in di!idends. $hich one of the follo in" statements is correct in relation to this in!estment% &. The di!idend yield is e7pressed as a percenta"e of the sellin" price. '. The capital "ain ould ha!e been less had Stacy not recei!ed the di!idends. C. The total dollar return per share is 5,. (. The capital "ains yield is positi!e. ). The di!idend yield is "reater than the capital "ains yield.
16. $hich one of the follo in" correctly describes the di!idend yield% &. ne7t year*s annual di!idend di!ided by today*s stock price '. this year*s annual di!idend di!ided by today*s stock price C. this year*s annual di!idend di!ided by ne7t year*s e7pected stock price (. ne7t year*s annual di!idend di!ided by this year*s annual di!idend ). the increase in ne7t year*s di!idend o!er this year*s di!idend di!ided by this year*s di!idend
11. 'ayside Marina 8ust announced it is decreasin" its annual di!idend from 51./- per share to 51.#6 per share effecti!e immediately. 9f the di!idend yield remains at its preannouncement le!el, then you kno the stock price: &. as unaffected by the announcement. '. increased proportionately ith the di!idend decrease. C. decreased proportionately ith the di!idend decrease. (. decreased by 56.1- per share. ). increased by 56.1- per share.
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12. $hich one of the follo in" statements related to capital "ains is correct% &. The capital "ains yield includes only reali1ed capital "ains. '. &n increase in an unreali1ed capital "ain ill increase the capital "ains yield. C. The capital "ains yield must be either positi!e or e+ual to 1ero. (. The capital "ains yield is e7pressed as a percenta"e of the sales price. ). The capital "ains yield represents the total return earned by an in!estor.
1,. $hich of the follo in" statements is correct in relation to a stock in!estment% 9. The capital "ains yield can be positi!e, ne"ati!e, or 1ero. 99. The di!idend yield can be positi!e, ne"ati!e, or 1ero. 999. The total return can be positi!e, ne"ati!e, or 1ero. 9;. <either the di!idend yield nor the total return can be ne"ati!e. &. 9 only '. 9 and 99 only C. 9 and 999 only (. 9 and 9; only ). 9; only
1-. The real rate of return on a stock is appro7imately e+ual to the nominal rate of return: &. multiplied by =1 > inflation rate?. '. plus the inflation rate. C. minus the inflation rate. (. di!ided by =1 > inflation rate?. ). di!ided by =1- inflation rate?.
1#. &s lon" as the inflation rate is positi!e, the real rate of return on a security ill be .... the nominal rate of return. &. "reater than '. e+ual to C. less than (. "reater than or e+ual to ). unrelated to
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1/. Small-company stocks, as the term is used in the te7tbook, are best defined as the: &. #66 ne est corporations in the @.S. '. firms hose stock trades ATC. C. smallest t enty percent of the firms listed on the <BS). (. smallest t enty-fi!e percent of the firms listed on <&S(&C. ). firms hose stock is listed on <&S(&C.
10. $hich one of the follo in" statements is a correct reflection of the @.S. markets for the period 142/-2660% &. @.S. Treasury bill returns ne!er e7ceeded a 4 percent return in any one year durin" the period. '. @.S. Treasury bills pro!ided a positi!e rate of return each and e!ery year durin" the period. C. 9nflation e+ualed or e7ceeded the return on @.S. Treasury bills e!ery year durin" the period. (. Lon"-term "o!ernment bonds outperformed @.S. Treasury bills e!ery year durin" the period. ). <ational deflation occurred at least once e!ery decade durin" the period.
12. $hich one of the follo in" cate"ories of securities had the hi"hest a!era"e return for the period 142/-2660% &. @.S. Treasury bills '. lar"e company stocks C. small company stocks (. lon"-term corporate bonds ). lon"-term "o!ernment bonds
14. $hich one of the follo in" cate"ories of securities had the lo est a!era"e risk premium for the period 142/-2660% &. lon"-term "o!ernment bonds '. small company stocks C. lar"e company stocks (. lon"-term corporate bonds ). @.S. Treasury bills
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26. $hich one of the follo in" cate"ories of securities has had the most !olatile returns o!er the period 142/-2660% &. lon"-term corporate bonds '. lar"e-company stocks C. intermediate-term "o!ernment bonds (. @.S. Treasury bills ). small-company stocks
21. $hich one of the follo in" statements correctly applies to the period 142/-2660% &. Lar"e-company stocks earned a hi"her a!era"e risk premium than did small-company stocks. '. 9ntermediate-term "o!ernment bonds had a hi"her a!era"e return than lon"-term corporate bonds. C. Lar"e-company stocks had an a!era"e annual return of 1-.0 percent. (. 9nflation a!era"ed 2./ percent for the period. ). @.S. Treasury bills had a positi!e a!era"e real rate of return.
22. $hich one of the follo in" time periods is associated ith hi"h rates of inflation% &. 1424-14,, '. 14#0-14/1 C. 1402-1421 (. 1442-144/ ). 2661-266#
2,. $hich one of the follo in" statements concernin" @.S. Treasury bills is correct for the period 142/-2660% &. The annual rate of return al ays e7ceeded the annual inflation rate. '. The a!era"e risk premium as 6.0 percent. C. The annual rate of return as al ays positi!e. (. The a!era"e e7cess return as 1.1 percent. ). The a!era"e real rate of return as 1ero.
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2-. $hich one of the follo in" is a correct rankin" of securities based on their !olatility o!er the period of 142/-2660% Dank from hi"hest to lo est. &. lar"e company stocks, @.S. Treasury bills, lon"-term "o!ernment bonds '. small company stocks, lon"-term corporate bonds, lar"e company stocks C. small company stocks, lon"-term corporate bonds, intermediate-term "o!ernment bonds (. lar"e company stocks, small company stocks, lon"-term "o!ernment bonds ). intermediate-term "o!ernment bonds, lon"-term corporate bonds, @.S. Treasury bills
2#. $hat as the hi"hest annual rate of inflation durin" the period 142/-2660% &. bet een 6 and , percent '. bet een , and # percent C. bet een # and 16 percent (. bet een 16 and 1# percent ). bet een 1# and 26 percent
2/. The e7cess return is computed as the: &. return on a security minus the inflation rate. '. return on a risky security minus the risk-free rate. C. risk premium on a risky security minus the risk-free rate. (. the risk-free rate plus the inflation rate. ). risk-free rate minus the inflation rate.
20. $hich one of the follo in" earned the hi"hest risk premium o!er the period 142/-2660% &. lon"-term corporate bonds '. @.S. Treasury bills C. small-company stocks (. lar"e-company stocks ). lon"-term "o!ernment bonds
22. $hat as the a!era"e rate of inflation o!er the period of 142/-2660% &. less than 2.6 percent '. bet een 2.6 and 2.# percent C. bet een 2.# and ,.6 percent (. bet een ,.6 and ,.# percent ). "reater than ,.# percent
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24. &ssume that you in!est in a portfolio of lar"e-company stocks. Eurther assume that the portfolio ill earn a rate of return similar to the a!era"e return on lar"e-company stocks for the period 142/-2660. $hat rate of return should you e7pect to earn% &. less than 16 percent '. bet een 16 and 12.# percent C. bet een 12.# and 1# percent (. bet een 1# and 10.# percent ). more than 10.# percent
,6. The a!era"e annual return on small-company stocks as about ..... percent "reater than the a!era"e annual return on lar"e-company stocks o!er the period 142/-2660. &. , '. # C. 0 (. 4 ). 11
,1. $hich one of the follo in" as the least !olatile o!er the period of 142/-2660% &. lar"e-company stocks '. inflation C. lon"-term corporate bonds (. @.S. Treasury bills ). intermediate-term "o!ernment bonds
,2. $hich one of the follo in" statements is correct% &. The "reater the !olatility of returns, the "reater the risk premium. '. The lo er the !olatility of returns, the "reater the risk premium. C. The lo er the a!era"e return, the "reater the risk premium. (. The risk premium is unrelated to the a!era"e rate of return. ). The risk premium is not affected by the !olatility of returns.
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,,. $hich of the follo in" correspond to a ide fre+uency distribution% 9. relati!ely lo risk 99. relati!ely lo rate of return 999. relati!ely hi"h standard de!iation 9;. relati!ely lar"e risk premium &. 99 only '. 999 only C. 9 and 99 only (. 99 and 999 only ). 999 and 9; only
,-. To con!ince in!estors to accept "reater !olatility, you must: &. decrease the risk premium. '. increase the risk premium. C. decrease the real return. (. decrease the risk-free rate. ). increase the risk-free rate.
,#. 9f the !ariability of the returns on lar"e-company stocks ere to increase o!er the lon"term, you ould e7pect hich of the follo in" to occur as a result% 9. decrease in the a!era"e rate of return 99. increase in the risk premium 999. increase in the /2 percent probability ran"e of the fre+uency distribution of returns 9;. decrease in the standard de!iation &. 9 only '. 9; only C. 99 and 999 only (. 9 and 999 only ). 99 and 9; only
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,/. $hich one of the follo in" statements is correct based on the historical record for the period 142/-2660% &. The standard de!iation of returns for small-company stocks as double that of lar"ecompany stocks. '. @.S. Treasury bills had a 1ero standard de!iation of returns because they are considered to be risk-free. C. Lon"-term "o!ernment bonds had a lo er return but a hi"her standard de!iation on a!era"e than did lon"-term corporate bonds. (. 9nflation as less !olatile than the returns on @.S. Treasury bills. ). Lon"-term "o!ernment bonds underperformed intermediate-term "o!ernment bonds.
,0. $hat is the probability that small-company stocks ill produce an annual return that is more than one standard de!iation belo the a!era"e% &. 1.6 percent '. 2.# percent C. #.6 percent (. 1/ percent ). ,2 percent
,2. &ccordin" to Feremy Sie"el, the real return on stocks o!er the lon"-term has a!era"ed about: &. /.2 percent '. 2.0 percent C. 16.- percent (. 12., percent ). 1-.2 percent
,4. The historical record for the period 142/-2660 supports hich one of the follo in" statements% &. & hi"her-risk security ill pro!ide a hi"her rate of return ne7t year than ill a lo er-risk security. '. 9f you need a stated amount of money ne7t year, your best in!estment option today for those funds ould be lon"-term "o!ernment bonds. C. 9ncreased lon"-run potential returns are obtained by lo erin" risks. (. 9t is possible for small-company stocks to more than double in !alue in any one "i!en year. ). 9nflation as positi!e each year throu"hout the period of 142/-2660.
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-6. $hich of the follo in" statements are true based on the historical record for 142/-2660% 9. Disk and potential re ard are in!ersely related. 99. Disk-free securities produce a positi!e real rate of return each year. 999. Deturns are more predictable o!er the short-term than they are o!er the lon"-term. 9;. 'onds are "enerally a safer in!estment than are stocks. &. 9 only '. 9; only C. 99 and 999 only (. 99 and 9; only ). 99, 999, and 9; only
-1. )stimates of the rate of return on a security based on a historical arithmetic a!era"e ill probably tend to ..... the e7pected return for the lon"-term hile estimates usin" the historical "eometric a!era"e ill probably tend to ..... the e7pected return for the shortterm. &. o!erestimateG o!erestimate '. o!erestimateG underestimate C. underestimateG o!erestimate (. underestimateG underestimate ). accuratelyG accurately
-2. The primary purpose of 'lume*s formula is to: &. compute an accurate historical rate of return. '. determine a stock*s true current !alue. C. consider compoundin" hen estimatin" a rate of return. (. determine the actual real rate of return. ). pro8ect future rates of return.
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-,. $hich t o of the follo in" are the most likely reasons hy a stock price mi"ht not react at all on the day that ne information related to the stock issuer is released% 9. insiders kne the information prior to the announcement 99. in!estors need time to di"est the information prior to reactin" 999. the information has no bearin" on the !alue of the firm 9;. the information as anticipated &. 9 and 99 only '. 9 and 999 only C. 99 and 999 only (. 99 and 9; only ). 999 and 9; only
--. $hich one of the follo in" is most indicati!e of a totally efficient stock market% &. e7traordinary returns earned on a routine basis '. positi!e net present !alues on stock in!estments o!er the lon"-term C. 1ero net present !alues for all stock in!estments (. arbitra"e opportunities hich de!elop on a routine basis ). reali1in" ne"ati!e returns on a routine basis
-#. $hich one of the follo in" statements is correct concernin" market efficiency% &. Deal asset markets are more efficient than financial markets. '. 9f a market is efficient, arbitra"e opportunities should be common. C. 9n an efficient market, some market participants ill ha!e an ad!anta"e o!er others. (. & firm ill "enerally recei!e a fair price hen it issues ne shares of stock. ). <e information ill "radually be reflected in a stock*s price to a!oid any sudden chan"e in the price of the stock.
-/. )fficient financial markets fluctuate continuously because: &. the markets are continually reactin" to old information as that information is absorbed. '. the markets are continually reactin" to ne information. C. arbitra"e tradin" is limited. (. current tradin" systems re+uire human inter!ention. ). in!estments produce !aryin" le!els of net present !alues.
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-0. 9nside information has the least !alue hen financial markets are: &. eak form efficient. '. semi eak form efficient. C. semistron" form efficient. (. stron" form efficient. ). inefficient.
-2. &ccordin" to theory, studyin" historical stock price mo!ements to identify mispriced stocks: &. is effecti!e as lon" as the market is only semistron" form efficient. '. is effecti!e pro!ided the market is only eak form efficient. C. is ineffecti!e e!en hen the market is only eak form efficient. (. becomes ineffecti!e as soon as the market "ains semistron" form efficiency. ). is ineffecti!e only in stron" form efficient markets.
-4. $hich of the follo in" statements related to market efficiency tend to be supported by current e!idence% 9. Markets tend to respond +uickly to ne information. 99. 9t is difficult for in!estors to earn abnormal returns. 999. Short-run prices are difficult to predict accurately based on public information. 9;. Markets are most likely eak form efficient. &. 9 and 999 only '. 99 and 9; only C. 9 and 9; only (. 9, 999, and 9; only ). 9, 99, and 999 only
#6. 9f you e7cel in analy1in" the future outlook of firms, you ould prefer the financial markets be .... form efficient so that you can ha!e an ad!anta"e in the marketplace. &. eak '. semi eak C. semistron" (. stron" ). perfect
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#1. Bou are a are that your nei"hbor trades stocks based on confidential information he o!erhears at his orkplace. This information is not a!ailable to the "eneral public. This nei"hbor continually bra"s to you about the profits he earns on these trades. Hi!en this, you ould tend to ar"ue that the financial markets are at best ..... form efficient. &. eak '. semi eak C. semistron" (. stron" ). perfect
#2. The @.S. Securities and )7chan"e Commission periodically char"es indi!iduals ith insider tradin" and claims those indi!iduals ha!e made unfair profits. Hi!en this, you ould be most apt to ar"ue that the markets are less than ..... form efficient. &. eak '. semi eak C. semistron" (. stron" ). perfect
#,. 9ndi!iduals ho continually monitor the financial markets seekin" mispriced securities: &. earn e7cess profits o!er the lon"-term. '. make the markets increasin"ly more efficient. C. are ne!er able to find a security that is temporarily mispriced. (. are o!er helmin"ly successful in earnin" abnormal profits. ). are al ays +uite successful usin" only historical price information as their basis of e!aluation.
#-. Ane year a"o, you purchased a stock at a price of 5,2.1/. The stock pays +uarterly di!idends of 56.26 per share. Today, the stock is sellin" for 522.26 per share. $hat is your capital "ain on this in!estment% &. -5-.1/ '. -5,.4/ C. -5,.0/ (. -5,.1/ ). -52.4/
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##. Si7 months a"o, you purchased 166 shares of stock in Hlobal Tradin" at a price of 5,2.06 a share. The stock pays a +uarterly di!idend of 56.1# a share. Today, you sold all of your shares for 5-6.16 per share. $hat is the total amount of your di!idend income on this in!estment% &. 51# '. 5,6 C. 5-# (. 5#6 ). 5/6
#/. & year a"o, you purchased -66 shares of Stellar $ood 3roducts, 9nc. stock at a price of 52./2 per share. The stock pays an annual di!idend of 56.16 per share. Today, you sold all of your shares for 5-.26 per share. $hat is your total dollar return on this in!estment% &. -5,22 '. -5,02 C. -51,#22 (. -51,-22 ). -51,,/6
#0. Bou o n -66 shares of $estern Eeed Mills stock !alued at 5#1.26 per share. $hat is the di!idend yield if your annual di!idend income is 5,#2% &. 1./2 percent '. 1.02 percent C. 1.2, percent (. 1.1, percent ). 1.21 percent
#2. $est $ind Tours stock is currently sellin" for 5-2 a share. The stock has a di!idend yield of 2./ percent. Ho much di!idend income ill you recei!e per year if you purchase 266 shares of this stock% &. 52-.4/ '. 5,/.26 C. 512-.26 (. 5,/2.66 ). 52-4./6
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#4. Ane year a"o, you purchased a stock at a price of 5-0.#6 a share. Today, you sold the stock and reali1ed a total loss of 22.11 percent. Bour capital "ain as -512.06 a share. $hat as your di!idend yield% &. -./, percent '. -.22 percent C. #.62 percent (. 12./0 percent ). 1-.,2 percent
/6. Bou 8ust sold /66 shares of $esley, 9nc. stock at a price of 5,1.64 a share. Last year, you paid 5,6.42 a share to buy this stock. A!er the course of the year, you recei!ed di!idends totalin" 51.26 per share. $hat is your total capital "ain on this in!estment% &. -5/12 '. -5162 C. 5162 (. 5/12 ). 5026
/1. Last year, you purchased #66 shares of &nalo" (e!ices, 9nc. stock for 511.1/ a share. Bou ha!e recei!ed a total of 5126 in di!idends and 50,146 from sellin" the shares. $hat is your capital "ains yield on this stock% &. 2/.06 percent '. 2/.0, percent C. 22.2# percent (. 24.1, percent ). ,1.62 percent
/2. Today, you sold 266 shares of 9ndian Di!er 3roduce stock. Bour total return on these shares is #./# percent. Bou purchased the shares one year a"o at a price of 5,1.16 a share. Bou ha!e recei!ed a total of 5166 in di!idends o!er the course of the year. $hat is your capital "ains yield on this in!estment% &. ,./2 percent '. -.6- percent C. #./0 percent (. 0.2/ percent ). 0.-1 percent
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/,. Eour months a"o, you purchased 1,#66 shares of Lakeside 'ank stock for 511.26 a share. Bou ha!e recei!ed di!idend payments e+ual to 56.2# a share. Today, you sold all of your shares for 52./6 a share. $hat is your total dollar return on this in!estment% &. -5,,466 '. -5,,#2# C. -5,,1#6 (. -52,4#6 ). -52,20#
/-. Ane year a"o, you purchased #66 shares of 'est $in"s, 9nc. stock at a price of 54./6 a share. The company pays an annual di!idend of 56.16 per share. Today, you sold all of your shares for 51#./6 a share. $hat is your total percenta"e return on this in!estment% &. ,2.-/ percent '. ,4.16 percent C. ,4.02 percent (. /2.#6 percent ). /,.#- percent
/#. Last year, you purchased a stock at a price of 5-0.16 a share. A!er the course of the year, you recei!ed 52.-6 per share in di!idends hile inflation a!era"ed ,.- percent. Today, you sold your shares for 5-4.#6 a share. $hat is your appro7imate real rate of return on this in!estment% &. /.,6 percent '. /.04 percent C. 0.12 percent (. 4./4 percent ). 16.14 percent
//. Ane year a"o, you purchased 266 shares of a stock at a price of 5#-.12 a share. Today, you sold those shares for 5-6.2# a share. (urin" the past year, you recei!ed total di!idends of 51/- hile inflation a!era"ed -.2 percent. $hat is your appro7imate real rate of return on this in!estment% &. -2-.26 percent '. -22.-6 percent C. -26.66 percent (. 26.66 percent ). 2-.26 percent
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/0. $hat is the amount of the e7cess return on a @.S. Treasury bill if the risk-free rate is 2.2 percent and the market rate of return is 2.,# percent% &. 6.66 percent '. 2.26 percent C. #.## percent (. 2.,# percent ). 11.1# percent
/2. & stock had returns of 11 percent, -12 percent, -21 percent, # percent, and ,- percent o!er the past fi!e years. $hat is the standard de!iation of these returns% &. 12.0- percent '. 26.21 percent C. 26./2 percent (. 22./6 percent ). 2,.-4 percent
/4. The common stock of &ir @nited, 9nc., had annual returns of 1#./ percent, 2.- percent, -11.2 percent, and ,2.4 percent o!er the last four years, respecti!ely. $hat is the standard de!iation of these returns% &. 1,.24 percent '. 1-.1- percent C. 1/.#6 percent (. 10.02 percent ). 14.6# percent
06. & stock had annual returns of ,./ percent, -2.0 percent, #./ percent, and 11.1 percent o!er the past four years. $hich one of the follo in" best describes the probability that this stock ill produce a return of 26 percent or more in a sin"le year% &. less than 6.1 percent '. less than 6.# percent but "reater than 6.1 percent C. less than 1.6 percent but "reater the 6.# percent (. less than 2.# percent but "reater than 1.6 percent ). less than # percent but "reater than 2.# percent
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01. & stock has an e7pected rate of return of 1, percent and a standard de!iation of 21 percent. $hich one of the follo in" best describes the probability that this stock ill lose at least half of its !alue in any one "i!en year% &. 6.1 percent '. 6.# percent C. 1.6 percent (. 2.# percent ). #.6 percent
02. & stock has returns of 12 percent, 11 percent, -21 percent, and / percent for the past four years. 'ased on this information, hat is the 4# percent probability ran"e of returns for any one "i!en year% &. -1,.#/ to 26.#/ percent '. -2-./6 to ,1.26 percent C. -,6./2 to ,0./2 percent (. --0./2 to #-./2 percent ). -01.0, to 01.0, percent
0,. Bour friend is the o ner of a stock hich had returns of 2# percent, -,/ percent, 1 percent, and 1/ percent for the past three years. Bour friend thinks the stock may be able to achie!e a return of #6 percent or more in a sin"le year. 'ased on these returns, hat is the probability that your friend is correct% &. less than 6.# percent '. "reater than 6.# percent but less than 1.6 percent C. "reater than 1.6 percent but less than 2.# percent (. "reater than 2.# percent but less than 1/ percent ). "reater than 1/.6 percent
0-. & stock had returns of 1# percent, 2 percent, 12 percent, -21 percent, and -- percent for the past fi!e years. 'ased on these returns, hat is the appro7imate probability that this stock ill return at least 1# percent in any one "i!en year% &. less than 6.# percent '. "reater than 6.# percent but less than 1.6 percent C. "reater than 1.6 percent but less than 2.# percent (. "reater than 2.# percent but less than 1/ percent ). "reater than 1/.6 percent
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0#. & stock had returns of 1- percent, 1, percent, -16 percent, and 0 percent for the past four years. $hich one of the follo in" best describes the probability that this stock ill lose no more than 16 percent in any one year% &. "reater than 6.# but less than 1.6 percent '. "reater than 1.6 percent but less than 2.# percent C. "reater than 2.# percent but less than 1/ percent (. "reater than 2- percent but less than 40.# percent ). "reater than 4# percent
0/. A!er the past fi!e years, a stock produced returns of 11 percent, 1- percent, 2 percent, -4 percent, and # percent. $hat is the probability that an in!estor in this stock ill not lose more than 16 percent in any one "i!en year% &. "reater than 6.# but less than 1.6 percent '. "reater than 1.6 percent but less than 2.# percent C. "reater than 2.# percent but less than 1/ percent (. "reater than 2- percent but less than 40.# percent ). "reater than 4# percent
00. & stock has annual returns of / percent, 1- percent, -, percent, and 2 percent for the past four years. The arithmetic a!era"e of these returns is ..... percent hile the "eometric a!era"e return for the period is ..... percent. &. -.#0G -.0# '. -.0#G -.#0 C. /.,,G /.14 (. /.14G /.,, ). /.,,G /.,,
02. & stock has annual returns of 1, percent, 21 percent, -12 percent, 0 percent, and -/ percent for the past fi!e years. The arithmetic a!era"e of these returns is ..... percent hile the "eometric a!era"e return for the period is ..... percent. &. ,.24G ,./2 '. ,.24G -./6 C. ,./2G ,.24 (. -./6G ,./2 ). -./6G ,.24
12-26
04. & stock had returns of 1/ percent, - percent, 2 percent, 1- percent, -4 percent, and -# percent o!er the past si7 years. $hat is the "eometric a!era"e return for this time period% &. -.2/ percent '. -./0 percent C. #.1, percent (. #.,4 percent ). #./6 percent
26. & stock had the follo in" prices and di!idends. $hat is the "eometric a!era"e return on this stock%
&. -1#.20 percent '. -1#.21 percent C. -1,.,, percent (. -12.41 percent ). -11.-2 percent
21. A!er the past fifteen years, the common stock of The Elo er Shoppe, 9nc. has produced an arithmetic a!era"e return of 12.2 percent and a "eometric a!era"e return of 11.# percent. $hat is the pro8ected return on this stock for the ne7t fi!e years accordin" to 'lume*s formula% &. 11.06 percent '. 11.24 percent C. 12.66 percent (. 12.6, percent ). 12.12 percent
12-21
22. 'ased on past 2/ years, $esterfield 9ndustrial Supply*s common stock has yielded an arithmetic a!era"e rate of return of 4./, percent. The "eometric a!era"e return for the same period as 2.#0 percent. $hat is the estimated return on this stock for the ne7t - years accordin" to 'lume*s formula% &. 2.06 percent '. 2.42 percent C. 4.1, percent (. 4.,2 percent ). 4.#6 percent
2,. & stock has a "eometric a!era"e return of 1-./ percent and an arithmetic a!era"e return of 1#.# percent based on the last ,, years. $hat is the estimated a!era"e rate of return for the ne7t / years based on 'lume*s formula% &. 1-.04 percent '. 1-.4/ percent C. 1#.22 percent (. 1#.,/ percent ). 1#.-2 percent
Essay Questions
2-. (efine and e7plain the three forms of market efficiency.
2#. $hat are the t o primary lessons learned from capital market history% @se historical information to 8ustify that these lessons are correct.
12-22
2/. Ho can an in!estor lose money on a stock hile makin" money on a bond in!estment if there is a re ard for bearin" risk% &ren*t stocks riskier than bonds%
20. Sha n earned an a!era"e return of 1-./ percent on his in!estments o!er the past 26 years hile the SI3 #66, a measure of the o!erall market, only returned an a!era"e of 1,.4 percent. )7plain ho this can occur if the stock market is efficient.
22. Bou ant to in!est in an inde7 fund hich directly correlates to the o!erall @.S. stock market. Ho can you determine if the market risk premium you are e7pectin" to earn is reasonable for the lon"-term%
24. Suppose a stock had an initial price of 526 per share, paid a di!idend of 51.,# per share durin" the year, and had an endin" share price of 520. $hat as the capital "ains yield% &. 1.## percent '. 1./4 percent C. 2.6# percent (. 2.0# percent ). 16.-- percent
12-2,
46. Suppose you bou"ht a 1# percent coupon bond one year a"o for 54#6. The face !alue of the bond is 51,666. The bond sells for 542# today. 9f the inflation rate last year as 4 percent, hat as your total real rate of return on this in!estment% &. --.22 percent '. -#.,2 percent C. 4./1 percent (. 4.02 percent ). 16.-0 percent
41. Calculate the standard de!iation of the follo in" rates of return:
&. 16.04 percent '. 12./6 percent C. 1,.-2 percent (. 1-.-2 percent ). 1#.62 percent
42. Bou*!e obser!ed the follo in" returns on Crash-n-'urn Computer*s stock o!er the past fi!e years: 2 percent, -12 percent, 20 percent, 22 percent, and 12 percent. $hat is the !ariance of these returns% &. 6.62606 '. 6.62#22 C. 6.6102# (. 6.61/2). 6.62/,,
12-2-
4,. Bou*!e obser!ed the follo in" returns on Crash-n-'urn Computer*s stock o!er the past fi!e years: , percent, -16 percent, 2- percent, 22 percent, and 12 percent. Suppose the a!era"e inflation rate o!er this time period as ,./ percent and the a!era"e T-bill rate as -.2 percent. 'ased on this information, hat as the a!era"e nominal risk premium% &. #.1# percent '. #.-6 percent C. /.61 percent (. /.,0 percent ). /./6 percent
4-. Bou bou"ht one of Hreat $hite Shark Depellant Co.*s 16 percent coupon bonds one year a"o for 50/6. These bonds pay annual payments, ha!e a face !alue of 51,666, and mature 1years from no . Suppose you decide to sell your bonds today hen the re+uired return on the bonds is 1- percent. The inflation rate o!er the past year as ,.0 percent. $hat as your total real return on this in!estment% &. 2.40 percent '. 4.11 percent C. 4.12 percent (. 4.-- percent ). 4.#2 percent
4#. Bou find a certain stock that had returns of - percent, -# percent, -1# percent, and 1/ percent for four of the last fi!e years. The a!era"e return of the stock for the #-year period as 1, percent. $hat is the standard de!iation of the stock*s returns for the fi!e-year period% &. 21.,4 percent '. 2-.42 percent C. 20.1/ percent (. ,1.2, percent ). ,-.62 percent
12-2#
4/. & stock had returns of 12 percent, 1/ percent, 1, percent, 14 percent, 1# percent, and -/ percent o!er the last si7 years. $hat is the "eometric a!era"e return on the stock for this period% &. 16.46 percent '. 11.12 percent C. 1,.#/ percent (. 1-.0/ percent ). 1#.61 percent
40. &ssume that the returns from an asset are normally distributed. The a!era"e annual return for the asset is 12.1 percent and the standard de!iation of the returns is ,2.# percent. $hat is the appro7imate probability that your money ill triple in !alue in a sin"le year% &. less than 6.# percent '. less than 1 percent but "reater than 6.# percent C. less then 2.# percent but "reater than 1 percent (. less than # percent but "reater than 2.# percent ). less than 16 percent but "reater than # percent
42. A!er a ,--year period an asset had an arithmetic return of 1, percent and a "eometric return of 16.# percent. @sin" 'lume*s formula, hat is your best estimate of the future annual returns o!er the ne7t 16 years% &. 11.12 percent '. 11.20 percent C. 11.2- percent (. 12.,2 percent ). 12.-/ percent
12-2/
Chapter 12 Some Lessons from Capital Market History &ns er Jey
1. Last year, T-bills returned 2 percent hile your in!estment in lar"e-company stocks earned an a!era"e of # percent. $hich one of the follo in" terms refers to the difference bet een these t o rates of return% A. risk premium '. "eometric return C. arithmetic (. standard de!iation ). !ariance Defer to section 12.,
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: 'is( premium
12-20
2. $hich one of the follo in" best defines the !ariance of an in!estment*s annual returns o!er a number of years% &. The a!era"e s+uared difference bet een the arithmetic and the "eometric a!era"e annual returns. '. The s+uared summation of the differences bet een the actual returns and the a!era"e "eometric return. C. The a!era"e difference bet een the annual returns and the a!era"e return for the period. (. The difference bet een the arithmetic a!era"e and the "eometric a!era"e return for the period. E. The a!era"e s+uared difference bet een the actual returns and the arithmetic a!era"e return. Defer to section 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objecti e: !"#! Section: !"$+ &opic: ,ariance
,. Standard de!iation is a measure of hich one of the follo in"% &. a!era"e rate of return B. !olatility C. probability (. risk premium ). real returns Defer to section 12.-
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$+ &opic: Stan*ar* *e iation
12-22
-. $hich one of the follo in" is defined by its mean and its standard de!iation% &. arithmetic nominal return '. "eometric real return C. normal distribution (. !ariance ). risk premium Defer to section 12.-
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$+ &opic: Normal *istribution
#. The a!era"e compound return earned per year o!er a multi-year period is called the ..... a!era"e return. &. arithmetic '. standard C. !ariant D. "eometric ). real Defer to section 12.#
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: 0eometric a erage return
12-24
/. The return earned in an a!era"e year o!er a multi-year period is called the ..... a!era"e return. A. arithmetic '. standard C. !ariant (. "eometric ). real Defer to section 12.#
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: Arithmetic a erage return
0. &ssume that the market prices of the securities that trade in a particular market fairly reflect the a!ailable information related to those securities. $hich one of the follo in" terms best defines that market% &. riskless market '. e!enly distributed market C. 1ero !olatility market (. 'lume*s market E. efficient capital market Defer to section 12./
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#+ Section: !"$1 &opic: 2fficient capital mar(et
12-,6
2. $hich one of the follo in" statements best defines the efficient market hypothesis% &. )fficient markets limit competition. '. Security prices in efficient markets remain steady as ne information becomes a!ailable. C. Mispriced securities are common in efficient markets. D. &ll securities in an efficient market are 1ero net present !alue in!estments. ). 3rofits are remo!ed as a market incenti!e hen markets become efficient. Defer to section 12./
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#+ Section: !"$1 &opic: 2fficient mar(ets
4. Stacy purchased a stock last year and sold it today for 5, a share more than her purchase price. She recei!ed a total of 56.0# in di!idends. $hich one of the follo in" statements is correct in relation to this in!estment% &. The di!idend yield is e7pressed as a percenta"e of the sellin" price. '. The capital "ain ould ha!e been less had Stacy not recei!ed the di!idends. C. The total dollar return per share is 5,. D. The capital "ains yield is positi!e. ). The di!idend yield is "reater than the capital "ains yield. Defer to section 12.1
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: 'eturns
12-,1
16. $hich one of the follo in" correctly describes the di!idend yield% A. ne7t year*s annual di!idend di!ided by today*s stock price '. this year*s annual di!idend di!ided by today*s stock price C. this year*s annual di!idend di!ided by ne7t year*s e7pected stock price (. ne7t year*s annual di!idend di!ided by this year*s annual di!idend ). the increase in ne7t year*s di!idend o!er this year*s di!idend di!ided by this year*s di!idend Defer to section 12.1
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Di i*en* yiel*
11. 'ayside Marina 8ust announced it is decreasin" its annual di!idend from 51./- per share to 51.#6 per share effecti!e immediately. 9f the di!idend yield remains at its preannouncement le!el, then you kno the stock price: &. as unaffected by the announcement. '. increased proportionately ith the di!idend decrease. C. decreased proportionately ith the di!idend decrease. (. decreased by 56.1- per share. ). increased by 56.1- per share. Defer to section 12.1
AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objecti e: !"#! Section: !"$! &opic: Di i*en* yiel*
12-,2
12. $hich one of the follo in" statements related to capital "ains is correct% &. The capital "ains yield includes only reali1ed capital "ains. B. &n increase in an unreali1ed capital "ain ill increase the capital "ains yield. C. The capital "ains yield must be either positi!e or e+ual to 1ero. (. The capital "ains yield is e7pressed as a percenta"e of the sales price. ). The capital "ains yield represents the total return earned by an in!estor. Defer to section 12.1
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Capital gains yiel*
1,. $hich of the follo in" statements is correct in relation to a stock in!estment% 9. The capital "ains yield can be positi!e, ne"ati!e, or 1ero. 99. The di!idend yield can be positi!e, ne"ati!e, or 1ero. 999. The total return can be positi!e, ne"ati!e, or 1ero. 9;. <either the di!idend yield nor the total return can be ne"ati!e. &. 9 only '. 9 and 99 only C. 9 and 999 only (. 9 and 9; only ). 9; only Defer to section 12.1
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Stoc( returns
12-,,
1-. The real rate of return on a stock is appro7imately e+ual to the nominal rate of return: &. multiplied by =1 > inflation rate?. '. plus the inflation rate. C. minus the inflation rate. (. di!ided by =1 > inflation rate?. ). di!ided by =1- inflation rate?. Defer to section 12.,
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: 'eal return
1#. &s lon" as the inflation rate is positi!e, the real rate of return on a security ill be .... the nominal rate of return. &. "reater than '. e+ual to C. less than (. "reater than or e+ual to ). unrelated to Defer to section 12.,
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: 'eal return
12-,-
1/. Small-company stocks, as the term is used in the te7tbook, are best defined as the: &. #66 ne est corporations in the @.S. '. firms hose stock trades ATC. C. smallest t enty percent of the firms listed on the <BS). (. smallest t enty-fi!e percent of the firms listed on <&S(&C. ). firms hose stock is listed on <&S(&C. Defer to section 12.2
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$" &opic: Small#company stoc(s
10. $hich one of the follo in" statements is a correct reflection of the @.S. markets for the period 142/-2660% &. @.S. Treasury bill returns ne!er e7ceeded a 4 percent return in any one year durin" the period. B. @.S. Treasury bills pro!ided a positi!e rate of return each and e!ery year durin" the period. C. 9nflation e+ualed or e7ceeded the return on @.S. Treasury bills e!ery year durin" the period. (. Lon"-term "o!ernment bonds outperformed @.S. Treasury bills e!ery year durin" the period. ). <ational deflation occurred at least once e!ery decade durin" the period. Defer to section 12.2
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$" &opic: 3istorical recor*
12-,#
12. $hich one of the follo in" cate"ories of securities had the hi"hest a!era"e return for the period 142/-2660% &. @.S. Treasury bills '. lar"e company stocks C. small company stocks (. lon"-term corporate bonds ). lon"-term "o!ernment bonds Defer to section 12.,
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$% &opic: 3istorical returns
14. $hich one of the follo in" cate"ories of securities had the lo est a!era"e risk premium for the period 142/-2660% &. lon"-term "o!ernment bonds '. small company stocks C. lar"e company stocks (. lon"-term corporate bonds E. @.S. Treasury bills Defer to section 12.,
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#% Section: !"$% &opic: 'is( premium
12-,/
26. $hich one of the follo in" cate"ories of securities has had the most !olatile returns o!er the period 142/-2660% &. lon"-term corporate bonds '. lar"e-company stocks C. intermediate-term "o!ernment bonds (. @.S. Treasury bills E. small-company stocks Defer to section 12.-
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#% Section: !"$+ &opic: 3istorical ris(ss
21. $hich one of the follo in" statements correctly applies to the period 142/-2660% &. Lar"e-company stocks earned a hi"her a!era"e risk premium than did small-company stocks. '. 9ntermediate-term "o!ernment bonds had a hi"her a!era"e return than lon"-term corporate bonds. C. Lar"e-company stocks had an a!era"e annual return of 1-.0 percent. (. 9nflation a!era"ed 2./ percent for the period. E. @.S. Treasury bills had a positi!e a!era"e real rate of return. Defer to section 12.,
12-,0
22. $hich one of the follo in" time periods is associated ith hi"h rates of inflation% &. 1424-14,, '. 14#0-14/1 C. 1402-1421 (. 1442-144/ ). 2661-266# Defer to section 12.2
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$" &opic: )nflation
2,. $hich one of the follo in" statements concernin" @.S. Treasury bills is correct for the period 142/- 2660% &. The annual rate of return al ays e7ceeded the annual inflation rate. '. The a!era"e risk premium as 6.0 percent. C. The annual rate of return as al ays positi!e. (. The a!era"e e7cess return as 1.1 percent. ). The a!era"e real rate of return as 1ero. Defer to sections 12.2 and 12.,
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$" an* !"$% &opic: 3istorical returns
12-,2
2-. $hich one of the follo in" is a correct rankin" of securities based on their !olatility o!er the period of 142/-2660% Dank from hi"hest to lo est. &. lar"e company stocks, @.S. Treasury bills, lon"-term "o!ernment bonds '. small company stocks, lon"-term corporate bonds, lar"e company stocks C. small company stocks, lon"-term corporate bonds, intermediate-term "o!ernment bonds (. lar"e company stocks, small company stocks, lon"-term "o!ernment bonds ). intermediate-term "o!ernment bonds, lon"-term corporate bonds, @.S. Treasury bills Defer to section 12.-
AACSB: N/A Bloom's: -no.le*ge Difficulty: )nterme*iate Learning Objecti e: !"#% Section: !"$+ &opic: 3istorical ris(ss
2#. $hat as the hi"hest annual rate of inflation durin" the period 142/-2660% &. bet een 6 and , percent '. bet een , and # percent C. bet een # and 16 percent D. bet een 16 and 1# percent ). bet een 1# and 26 percent Defer to section 12.2
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$" &opic: )nflation
12-,4
2/. The e7cess return is computed as the: &. 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. (. the risk-free rate plus the inflation rate. ). risk-free rate minus the inflation rate. Defer to section 12.,
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: 24cess return
20. $hich one of the follo in" earned the hi"hest risk premium o!er the period 142/-2660% &. lon"-term corporate bonds '. @.S. Treasury bills C. small-company stocks (. lar"e-company stocks ). lon"-term "o!ernment bonds Defer to section 12.,
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#% Section: !"$% &opic: 'is( premium
12--6
22. $hat as the a!era"e rate of inflation o!er the period of 142/-2660% &. less than 2.6 percent '. bet een 2.6 and 2.# percent C. bet een 2.# and ,.6 percent D. bet een ,.6 and ,.# percent ). "reater than ,.# percent Defer to section 12.,
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$% &opic: )nflation
24. &ssume that you in!est in a portfolio of lar"e-company stocks. Eurther assume that the portfolio ill earn a rate of return similar to the a!era"e return on lar"e-company stocks for the period 142/-2660. $hat rate of return should you e7pect to earn% &. less than 16 percent B. bet een 16 and 12.# percent C. bet een 12.# and 1# percent (. bet een 1# and 10.# percent ). more than 10.# percent Defer to section 12.,
12--1
,6. The a!era"e annual return on small-company stocks as about ..... percent "reater than the a!era"e annual return on lar"e-company stocks o!er the period 142/-2660. &. , B. # C. 0 (. 4 ). 11 Defer to section 12.,
,1. $hich one of the follo in" as the least !olatile o!er the period of 142/-2660% &. lar"e-company stocks '. inflation C. lon"-term corporate bonds D. @.S. Treasury bills ). intermediate-term "o!ernment bonds Defer to section 12.-
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#% Section: !"$+ &opic: 3istorical ris(s
12--2
,2. $hich one of the follo in" statements is correct% A. The "reater the !olatility of returns, the "reater the risk premium. '. The lo er the !olatility of returns, the "reater the risk premium. C. The lo er the a!era"e return, the "reater the risk premium. (. The risk premium is unrelated to the a!era"e rate of return. ). The risk premium is not affected by the !olatility of returns. Defer to sections 12., and 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#% Section: !"$% an* !"$+ &opic: 'is( premium
,,. $hich of the follo in" correspond to a ide fre+uency distribution% 9. relati!ely lo risk 99. relati!ely lo rate of return 999. relati!ely hi"h standard de!iation 9;. relati!ely lar"e risk premium &. 99 only '. 999 only C. 9 and 99 only (. 99 and 999 only E. 999 and 9; only Defer to section 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#% Section: !"$+ &opic: 5re6uency *istribution
12--,
,-. To con!ince in!estors to accept "reater !olatility, you must: &. decrease the risk premium. B. increase the risk premium. C. decrease the real return. (. decrease the risk-free rate. ). increase the risk-free rate. Defer to section 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#% Section: !"$+ &opic: 'is( premium
,#. 9f the !ariability of the returns on lar"e-company stocks ere to increase o!er the lon"term, you ould e7pect hich of the follo in" to occur as a result% 9. decrease in the a!era"e rate of return 99. increase in the risk premium 999. increase in the /2 percent probability ran"e of the fre+uency distribution of returns 9;. decrease in the standard de!iation &. 9 only '. 9; only C. 99 and 999 only (. 9 and 999 only ). 99 and 9; only Defer to section 12.-
AACSB: N/A Bloom's: Analysis Difficulty: )nterme*iate Learning Objecti e: !"#% Section: !"$+ &opic: ,ariability of returns
12---
,/. $hich one of the follo in" statements is correct based on the historical record for the period 142/-2660% &. The standard de!iation of returns for small-company stocks as double that of lar"ecompany stocks. '. @.S. Treasury bills had a 1ero standard de!iation of returns because they are considered to be risk-free. C. Lon"-term "o!ernment bonds had a lo er return but a hi"her standard de!iation on a!era"e than did lon"-term corporate bonds. (. 9nflation as less !olatile than the returns on @.S. Treasury bills. ). Lon"-term "o!ernment bonds underperformed intermediate-term "o!ernment bonds. Defer to section 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objecti e: !"#% Section: !"$+ &opic: 3istorical returns an* ris(s
,0. $hat is the probability that small-company stocks ill produce an annual return that is more than one standard de!iation belo the a!era"e% &. 1.6 percent '. 2.# percent C. #.6 percent D. 1/ percent ). ,2 percent Defer to section 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#% Section: !"$+ &opic: 7robability *istribution
12--#
,2. &ccordin" to Feremy Sie"el, the real return on stocks o!er the lon"-term has a!era"ed about: A. /.2 percent '. 2.0 percent C. 16.- percent (. 12., percent ). 1-.2 percent Defer to section 12.#
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#" Section: !"$/ &opic: 3istorical returns
,4. The historical record for the period 142/-2660 supports hich one of the follo in" statements% &. & hi"her-risk security ill pro!ide a hi"her rate of return ne7t year than ill a lo er-risk security. '. 9f you need a stated amount of money ne7t year, your best in!estment option today for those funds ould be lon"-term "o!ernment bonds. C. 9ncreased lon"-run potential returns are obtained by lo erin" risks. D. 9t is possible for small-company stocks to more than double in !alue in any one "i!en year. ). 9nflation as positi!e each year throu"hout the period of 142/-2660. Defer to sections 12.2 and 12.-
AACSB: N/A Bloom's: -no.le*ge Difficulty: )nterme*iate Learning Objecti e: !"#" Section: !"$" an* !"$+ &opic: 3istorical returns
12--/
-6. $hich of the follo in" statements are true based on the historical record for 142/-2660% 9. Disk and potential re ard are in!ersely related. 99. Disk-free securities produce a positi!e real rate of return each year. 999. Deturns are more predictable o!er the short-term than they are o!er the lon"-term. 9;. 'onds are "enerally a safer in!estment than are stocks. &. 9 only B. 9; only C. 99 and 999 only (. 99 and 9; only ). 99, 999, and 9; only Defer to sections 12., and 12.-
AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objecti e: !"#" Section: !"$% an* !"$+ &opic: 3istorical returns an* ris(s
-1. )stimates of the rate of return on a security based on a historical arithmetic a!era"e ill probably tend to ..... the e7pected return for the lon"-term hile estimates usin" the historical "eometric a!era"e ill probably tend to ..... the e7pected return for the shortterm. &. o!erestimateG o!erestimate B. o!erestimateG underestimate C. underestimateG o!erestimate (. underestimateG underestimate ). accuratelyG accurately Defer to section 12.#
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: Blume's formula
12--0
-2. The primary purpose of 'lume*s formula is to: &. compute an accurate historical rate of return. '. determine a stock*s true current !alue. C. consider compoundin" hen estimatin" a rate of return. (. determine the actual real rate of return. E. pro8ect future rates of return. Defer to section 12.#
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: Blume's formula
-,. $hich t o of the follo in" are the most likely reasons hy a stock price mi"ht not react at all on the day that ne information related to the stock issuer is released% 9. insiders kne the information prior to the announcement 99. in!estors need time to di"est the information prior to reactin" 999. the information has no bearin" on the !alue of the firm 9;. the information as anticipated &. 9 and 99 only '. 9 and 999 only C. 99 and 999 only (. 99 and 9; only E. 999 and 9; only Defer to section 12./
AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objecti e: !"#+ Section: !"$1 &opic: 8ar(et efficiency
12--2
--. $hich one of the follo in" is most indicati!e of a totally efficient stock market% &. e7traordinary returns earned on a routine basis '. positi!e net present !alues on stock in!estments o!er the lon"-term C. 1ero net present !alues for all stock in!estments (. arbitra"e opportunities hich de!elop on a routine basis ). reali1in" ne"ati!e returns on a routine basis Defer to section 12./
-#. $hich one of the follo in" statements is correct concernin" market efficiency% &. Deal asset markets are more efficient than financial markets. '. 9f a market is efficient, arbitra"e opportunities should be common. C. 9n an efficient market, some market participants ill ha!e an ad!anta"e o!er others. D. & firm ill "enerally recei!e a fair price hen it issues ne shares of stock. ). <e information ill "radually be reflected in a stock*s price to a!oid any sudden chan"e in the price of the stock. Defer to section 12./
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#+ Section: !"$1 &opic: 8ar(et efficiency
12--4
-/. )fficient financial markets fluctuate continuously because: &. the markets are continually reactin" to old information as that information is absorbed. B. the markets are continually reactin" to ne information. C. arbitra"e tradin" is limited. (. current tradin" systems re+uire human inter!ention. ). in!estments produce !aryin" le!els of net present !alues. Defer to section 12./
-0. 9nside information has the least !alue hen financial markets are: &. eak form efficient. '. semi eak form efficient. C. semistron" form efficient. D. stron" form efficient. ). inefficient. Defer to section 12./
AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#+ Section: !"$1 &opic: 8ar(et efficiency
12-#6
-2. &ccordin" to theory, studyin" historical stock price mo!ements to identify mispriced stocks: &. is effecti!e as lon" as the market is only semistron" form efficient. '. is effecti!e pro!ided the market is only eak form efficient. C. is ineffecti!e e!en hen the market is only eak form efficient. (. becomes ineffecti!e as soon as the market "ains semistron" form efficiency. ). is ineffecti!e only in stron" form efficient markets. Defer to section 12./
-4. $hich of the follo in" statements related to market efficiency tend to be supported by current e!idence% 9. Markets tend to respond +uickly to ne information. 99. 9t is difficult for in!estors to earn abnormal returns. 999. Short-run prices are difficult to predict accurately based on public information. 9;. Markets are most likely eak form efficient. &. 9 and 999 only '. 99 and 9; only C. 9 and 9; only (. 9, 999, and 9; only E. 9, 99, and 999 only Defer to section 12./
AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objecti e: !"#+ Section: !"$1 &opic: 8ar(et efficiency
12-#1
#6. 9f you e7cel in analy1in" the future outlook of firms, you ould prefer the financial markets be .... form efficient so that you can ha!e an ad!anta"e in the marketplace. A. eak '. semi eak C. semistron" (. stron" ). perfect Defer to section 12./
#1. Bou are a are that your nei"hbor trades stocks based on confidential information he o!erhears at his orkplace. This information is not a!ailable to the "eneral public. This nei"hbor continually bra"s to you about the profits he earns on these trades. Hi!en this, you ould tend to ar"ue that the financial markets are at best ..... form efficient. &. eak '. semi eak C. semistron" (. stron" ). perfect Defer to section 12./
12-#2
#2. The @.S. Securities and )7chan"e Commission periodically char"es indi!iduals ith insider tradin" and claims those indi!iduals ha!e made unfair profits. Hi!en this, you ould be most apt to ar"ue that the markets are less than ..... form efficient. &. eak '. semi eak C. semistron" D. stron" ). perfect Defer to section 12./
#,. 9ndi!iduals ho continually monitor the financial markets seekin" mispriced securities: &. earn e7cess profits o!er the lon"-term. B. make the markets increasin"ly more efficient. C. are ne!er able to find a security that is temporarily mispriced. (. are o!er helmin"ly successful in earnin" abnormal profits. ). are al ays +uite successful usin" only historical price information as their basis of e!aluation. Defer to section 12./
12-#,
#-. Ane year a"o, you purchased a stock at a price of 5,2.1/. The stock pays +uarterly di!idends of 56.26 per share. Today, the stock is sellin" for 522.26 per share. $hat is your capital "ain on this in!estment% &. -5-.1/ B. -5,.4/ C. -5,.0/ (. -5,.1/ ). -52.4/ Capital "ain K 522.26 - 5,2.1/ K -5,.4/
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Capital gain
##. Si7 months a"o, you purchased 166 shares of stock in Hlobal Tradin" at a price of 5,2.06 a share. The stock pays a +uarterly di!idend of 56.1# a share. Today, you sold all of your shares for 5-6.16 per share. $hat is the total amount of your di!idend income on this in!estment% &. 51# B. 5,6 C. 5-# (. 5#6 ). 5/6 (i!idend income K =56.1# 2? 166 K 5,6
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Di i*en* income
12-#-
#/. & year a"o, you purchased -66 shares of Stellar $ood 3roducts, 9nc. stock at a price of 52./2 per share. The stock pays an annual di!idend of 56.16 per share. Today, you sold all of your shares for 5-.26 per share. $hat is your total dollar return on this in!estment% &. -5,22 '. -5,02 C. -51,#22 D. -51,-22 ). -51,,/6 Total dollar return K =5-.26 - 52./2 > 56.16? -66 K -51,-22
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: &otal *ollar return
#0. Bou o n -66 shares of $estern Eeed Mills stock !alued at 5#1.26 per share. $hat is the di!idend yield if your annual di!idend income is 5,#2% &. 1./2 percent B. 1.02 percent C. 1.2, percent (. 1.1, percent ). 1.21 percent (i!idend yield K =5,#2L-66?L5#1.26 K 1.02 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Di i*en* yiel*
12-##
#2. $est $ind Tours stock is currently sellin" for 5-2 a share. The stock has a di!idend yield of 2./ percent. Ho much di!idend income ill you recei!e per year if you purchase 266 shares of this stock% &. 52-.4/ '. 5,/.26 C. 512-.26 (. 5,/2.66 E. 52-4./6 (i!idend income K 5-2 6.62/ 266 K 52-4./6
#4. Ane year a"o, you purchased a stock at a price of 5-0.#6 a share. Today, you sold the stock and reali1ed a total loss of 22.11 percent. Bour capital "ain as -512.06 a share. $hat as your di!idend yield% A. -./, percent '. -.22 percent C. #.62 percent (. 12./0 percent ). 1-.,2 percent (i!idend yield K -6.2211 - =-12.06L5-0.#6? K -./, percent
12-#/
/6. Bou 8ust sold /66 shares of $esley, 9nc. stock at a price of 5,1.64 a share. Last year, you paid 5,6.42 a share to buy this stock. A!er the course of the year, you recei!ed di!idends totalin" 51.26 per share. $hat is your total capital "ain on this in!estment% &. -5/12 '. -5162 C. 5162 (. 5/12 ). 5026 Capital "ain K =5,1.64 - 5,6.42? /66 K 5162
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Capital gain
/1. Last year, you purchased #66 shares of &nalo" (e!ices, 9nc. stock for 511.1/ a share. Bou ha!e recei!ed a total of 5126 in di!idends and 50,146 from sellin" the shares. $hat is your capital "ains yield on this stock% &. 2/.06 percent '. 2/.0, percent C. 22.2# percent (. 24.1, percent ). ,1.62 percent Capital "ains yield K M=50,146L#66? - 511.1/NL511.1/ K 22.2# percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Capital gains yiel*
12-#0
/2. Today, you sold 266 shares of 9ndian Di!er 3roduce stock. Bour total return on these shares is #./# percent. Bou purchased the shares one year a"o at a price of 5,1.16 a share. Bou ha!e recei!ed a total of 5166 in di!idends o!er the course of the year. $hat is your capital "ains yield on this in!estment% &. ,./2 percent B. -.6- percent C. #./0 percent (. 0.2/ percent ). 0.-1 percent Capital "ains yield K .6#/# - M=5166L5266?L5,1.16N K -.6- percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Capital gains yiel*
/,. Eour months a"o, you purchased 1,#66 shares of Lakeside 'ank stock for 511.26 a share. Bou ha!e recei!ed di!idend payments e+ual to 56.2# a share. Today, you sold all of your shares for 52./6 a share. $hat is your total dollar return on this in!estment% &. -5,,466 B. -5,,#2# C. -5,,1#6 (. -52,4#6 ). -52,20# Total dollar return K =52./6 - 511.26 > 56.2#? 1,#66 K -5,,#2#
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: Dollar returns
12-#2
/-. Ane year a"o, you purchased #66 shares of 'est $in"s, 9nc. stock at a price of 54./6 a share. The company pays an annual di!idend of 56.16 per share. Today, you sold all of your shares for 51#./6 a share. $hat is your total percenta"e return on this in!estment% &. ,2.-/ percent '. ,4.16 percent C. ,4.02 percent (. /2.#6 percent E. /,.#- percent Total percenta"e return K =51#./6 - 54./6 > 56.16?L54./6 K /,.#- percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$! &opic: 7ercentage return
/#. Last year, you purchased a stock at a price of 5-0.16 a share. A!er the course of the year, you recei!ed 52.-6 per share in di!idends hile inflation a!era"ed ,.- percent. Today, you sold your shares for 5-4.#6 a share. $hat is your appro7imate real rate of return on this in!estment% &. /.,6 percent B. /.04 percent C. 0.12 percent (. 4./4 percent ). 16.14 percent <ominal return K =5-4.#6 - 5-0.16 > 52.-6?L5-0.16 K 16.14 percent &ppro7imate real return K 6.1614 - 6.6,- K /.04 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: Appro4imate real return
12-#4
//. Ane year a"o, you purchased 266 shares of a stock at a price of 5#-.12 a share. Today, you sold those shares for 5-6.2# a share. (urin" the past year, you recei!ed total di!idends of 51/- hile inflation a!era"ed -.2 percent. $hat is your appro7imate real rate of return on this in!estment% &. -2-.26 percent B. -22.-6 percent C. -26.66 percent (. 26.66 percent ). 2-.26 percent <ominal return K M5-6.2# - 5#-.12 > =51/-L266?NL5#-.12 K -6.2-26 &ppro7imate real return K -6.2-26 - 6.6-2 K -22.-6 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: Appro4imate real return
/0. $hat is the amount of the e7cess return on a @.S. Treasury bill if the risk-free rate is 2.2 percent and the market rate of return is 2.,# percent% A. 6.66 percent '. 2.26 percent C. #.## percent (. 2.,# percent ). 11.1# percent There is no e7cess return, or risk premium, for a risk-free security such as the T-bill.
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$% &opic: 'is(#free security
12-/6
/2. & stock had returns of 11 percent, -12 percent, -21 percent, # percent, and ,- percent o!er the past fi!e years. $hat is the standard de!iation of these returns% &. 12.0- percent '. 26.21 percent C. 26./2 percent D. 22./6 percent ). 2,.-4 percent &!era"e return K =6.11 - 6.12 - 6.21 > 6.6# > 6.,-?L# K .622G K M1L=# - 1?N M=6.11 - 6.622?2 > =-6.12 - 6.622?2 > =-6.21 -6.622?2 > =6.6# - 6.622?2 > =6.,- 6.622?2N K 22./6 percent
AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate Learning Objecti e: !"#! Section: !"$+ &opic: Stan*ar* *e iation
/4. The common stock of &ir @nited, 9nc., had annual returns of 1#./ percent, 2.- percent, -11.2 percent, and ,2.4 percent o!er the last four years, respecti!ely. $hat is the standard de!iation of these returns% &. 1,.24 percent '. 1-.1- percent C. 1/.#6 percent (. 10.02 percent E. 14.6# percent &!era"e return K =6.1#/ > 6.62- - 6.112 > 6.,24?L- K -.6400# KM1L=- - 1?N M=6.1#/ - 6.6400#?2 > =6.62- - 6.6400#?2 > =-6.112 - 6.6400#?2 > =6.,24 6.6400#?2N K 14.6# percent
AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate Learning Objecti e: !"#! Section: !"$+ &opic: Stan*ar* *e iation
12-/1
06. & stock had annual returns of ,./ percent, -2.0 percent, #./ percent, and 11.1 percent o!er the past four years. $hich one of the follo in" best describes the probability that this stock ill produce a return of 26 percent or more in a sin"le year% &. less than 6.1 percent '. less than 6.# percent but "reater than 6.1 percent C. less than 1.6 percent but "reater the 6.# percent D. less than 2.# percent but "reater than 1.6 percent ). less than # percent but "reater than 2.# percent &!era"e return K =6.6,/ - 6.620 > 6.6#/ > 6.111?L- K 6.6246 K M1L=- - 1?N M=6.6,/ - 6.624?2 > =-6.620 - 6.624?2 > =6.6#/ - 6.624?2 > =6.111 - 6.624?2N K 6.62,/ @pper end of 4# percent ran"e K 6.6246 > =2 6.62,/? K 14./2 percent @pper end of 44 percent ran"e K 6.6246 > =, 6.62,/? K 20.42 percent & return of 26 percent or more in a sin"le year has bet een a 1 percent and a 2.# percent probability of occurrin" in any one year.
AACSB: Analytic Bloom's: Analysis Difficulty: )nterme*iate Learning Objecti e: !"#% Section: !"$+ &opic: 7robability of occurrence
01. & stock has an e7pected rate of return of 1, percent and a standard de!iation of 21 percent. $hich one of the follo in" best describes the probability that this stock ill lose at least half of its !alue in any one "i!en year% &. 6.1 percent B. 6.# percent C. 1.6 percent (. 2.# percent ). #.6 percent Lo er bound of 44 percent ran"e K 6.1, - =, 6.21? K -#6 percent 3robability of losin" #6 percent or more in any one year is 6.# percent.
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objecti e: !"#% Section: !"$+ &opic: 7robability of occurrence
12-/2
02. & stock has returns of 12 percent, 11 percent, -21 percent, and / percent for the past four years. 'ased on this information, hat is the 4# percent probability ran"e of returns for any one "i!en year% &. -1,.#/ to 26.#/ percent '. -2-./6 to ,1.26 percent C. -,6./2 to ,0./2 percent (. --0./2 to #-./2 percent ). -01.0, to 01.0, percent &!era"e return K =6.12 > 6.11 - 6.21 > 6.6/?L- K 6.6,# K =6.12 - 6.6,#?2 > =6.11 - 6.6,#?2 > =-6.21 - 6.6,#?2 > =6.6/ - 6.6,#?2N K .106#20 4#O probability ran"e K 6.6,# =2 6.106#20? percent K -,6./2 to ,0./2 percent
0,. Bour friend is the o ner of a stock hich had returns of 2# percent, -,/ percent, 1 percent, and 1/ percent for the past three years. Bour friend thinks the stock may be able to achie!e a return of #6 percent or more in a sin"le year. 'ased on these returns, hat is the probability that your friend is correct% &. less than 6.# percent '. "reater than 6.# percent but less than 1.6 percent C. "reater than 1.6 percent but less than 2.# percent D. "reater than 2.# percent but less than 1/ percent ). "reater than 1/.6 percent &!era"e return K =6.2# - 6.,/ > 6.61 > 6.1/?L- K 6.61# K M1L=- - 1?N M=6.2# - 6.61#?2 > =-6.,/ - 6.61#?2 > =6.61 - 6.61#?2 > =6.1/ - 6.61#?2N K 6.2/24 @pper end of /2 percent ran"e K 6.61# > =1 6.2/24? K 22.,4 percent @pper end of 4# percent ran"e K 6.61# > =2 6.2/24? K ##.22 percent The probability of earnin" at least #6 percent in any one year is "reater than 2.# percent but less than 1/ percent.
12-/,
0-. & stock had returns of 1# percent, 2 percent, 12 percent, -21 percent, and -- percent for the past fi!e years. 'ased on these returns, hat is the appro7imate probability that this stock ill return at least 1# percent in any one "i!en year% &. less than 6.# percent '. "reater than 6.# percent but less than 1.6 percent C. "reater than 1.6 percent but less than 2.# percent (. "reater than 2.# percent but less than 1/ percent E. "reater than 1/.6 percent &!era"e return K =6.1# > 6.62 > 6.12 - 6.21 - 6.6-?L# K 6.62 K M1L=# - 1?N M=6.1# - 6.62?2 > =6.62 - 6.62?2 > =6.12 - 6.62?2 > =-6.21 - 6.62?2 > =-6.6- 6.62?2N K 6.1-0# @pper end of /2 percent ran"e K 6.62 > 6.1-0# K 1/.0# percent 3robability of earnin" at least 1# percent in any one year is "reater than 1/ percent.
0#. & stock had returns of 1- percent, 1, percent, -16 percent, and 0 percent for the past four years. $hich one of the follo in" best describes the probability that this stock ill lose no more than 16 percent in any one year% &. "reater than 6.# but less than 1.6 percent '. "reater than 1.6 percent but less than 2.# percent C. "reater than 2.# percent but less than 1/ percent D. "reater than 2- percent but less than 40.# percent ). "reater than 4# percent &!era"e return K =6.1- > 6.1, - 6.16 > 6.60?L- K 6.6/ K M1L=- - 1?NM=6.1- - 6.6/?2 > =6.1, - 6.6/?2 > =-6.16 - 6.6/?2 > =6.60 - 6.6/?2N K 6.1116/ Lo er bound of /2 percent ran"e K 6.6/ - =1 6.1116/? K -#.11 percent Lo er bound of 4# percent ran"e K 6.6/ - =2 6.1116/? K -1/.21 percent 3robability of losin" more than 16 percent in any "i!en year is bet een 2.# and 1/ percent. Thus, the probability of <AT losin" more than 16 percent is bet een 2- and 40.# percent.
12-/-
0/. A!er the past fi!e years, a stock produced returns of 11 percent, 1- percent, 2 percent, -4 percent, and # percent. $hat is the probability that an in!estor in this stock ill not lose more than 16 percent in any one "i!en year% &. "reater than 6.# but less than 1.6 percent '. "reater than 1.6 percent but less than 2.# percent C. "reater than 2.# percent but less than 1/ percent D. "reater than 2- percent but less than 40.# percent ). "reater than 4# percent &!era"e return K =6.11 > 6.1- > 6.62 - 6.64 > 6.6#?L# K 6.6-/ K M1L=# - 1?NM=6.11 - 6.6-/?2 > =6.1- - 6.6-/?2 > =6.62 - 6.6-/?2 > =-6.64 - 6.6-/?2 > =6.6# 6.6-/?2N K 6.624/1 Lo er bound of /2O probability ran"e K 6.6-/ - =1 6.624/1? K --.,/ percent Lo er bound of 4#O probability ran"e K 6.6-/ - =2 6.624/1? K -1,.,2 percent The probability of losin" 16 percent or more is "reater than 2.# percent but less than 1/ percent. Thus, the probability of <AT losin" more than 16 percent is "reater than 2- percent but less than 40.# percent.
00. & stock has annual returns of / percent, 1- percent, -, percent, and 2 percent for the past four years. The arithmetic a!era"e of these returns is ..... percent hile the "eometric a!era"e return for the period is ..... percent. &. -.#0G -.0# B. -.0#G -.#0 C. /.,,G /.14 (. /.14G /.,, ). /.,,G /.,, &rithmetic a!era"e K =6.6/ > 6.1- - 6.6, > 6.62?L- K -.0# percent Heometric return K =1.6/ 1.1- 6.40 1.62?.2# - 1 K -.#0 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: Arithmetic an* geometric returns
12-/#
02. & stock has annual returns of 1, percent, 21 percent, -12 percent, 0 percent, and -/ percent for the past fi!e years. The arithmetic a!era"e of these returns is ..... percent hile the "eometric a!era"e return for the period is ..... percent. &. ,.24G ,./2 '. ,.24G -./6 C. ,./2G ,.24 (. -./6G ,./2 E. -./6G ,.24 &rithmetic a!era"e K =6.1, > 6.21- 6.12 > 6.60 - 6.6/?L# K -./6 percent Heometric return K =1.1, 1.21 6.22 1.60 6.4-?.26 - 1 K ,.24 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: Arithmetic an* geometric returns
04. & stock had returns of 1/ percent, - percent, 2 percent, 1- percent, -4 percent, and -# percent o!er the past si7 years. $hat is the "eometric a!era"e return for this time period% A. -.2/ percent '. -./0 percent C. #.1, percent (. #.,4 percent ). #./6 percent Heometric a!era"e K =1.1/ 1.6- 1.62 1.1- 6.41 6.4#?1L/ - 1 K -.2/ percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: 0eometric return
12-//
26. & stock had the follo in" prices and di!idends. $hat is the "eometric a!era"e return on this stock%
&. -1#.20 percent B. -1#.21 percent C. -1,.,, percent (. -12.41 percent ). -11.-2 percent Deturn for year 2 K =51/./2 - 51/.-6 > 56.#6?L51/.-6 K -.,462 percent Deturn for year , K =51#.-2 - 51/./2 > 56.#6?L51/./2 K -,.2#62 percent Deturn for year - K =54.1# - 51#.-2 > 56.2#?L51#.-2 K -,4.20/# percent Heometric return K =1.6-,462 6.4/1-42 6./602,#?1L, - 1 K -1#.21 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objecti e: !"#! Section: !"$/ &opic: 0eometric return
12-/0
21. A!er the past fifteen years, the common stock of The Elo er Shoppe, 9nc. has produced an arithmetic a!era"e return of 12.2 percent and a "eometric a!era"e return of 11.# percent. $hat is the pro8ected return on this stock for the ne7t fi!e years accordin" to 'lume*s formula% &. 11.06 percent '. 11.24 percent C. 12.66 percent (. 12.6, percent ). 12.12 percent
AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate Learning Objecti e: !"#! Section: !"$/ &opic: Blume's formula
22. 'ased on past 2/ years, $esterfield 9ndustrial Supply*s common stock has yielded an arithmetic a!era"e rate of return of 4./, percent. The "eometric a!era"e return for the same period as 2.#0 percent. $hat is the estimated return on this stock for the ne7t - years accordin" to 'lume*s formula% &. 2.06 percent '. 2.42 percent C. 4.1, percent (. 4.,2 percent E. 4.#6 percent
12-/2
2,. & stock has a "eometric a!era"e return of 1-./ percent and an arithmetic a!era"e return of 1#.# percent based on the last ,, years. $hat is the estimated a!era"e rate of return for the ne7t / years based on 'lume*s formula% &. 1-.04 percent '. 1-.4/ percent C. 1#.22 percent D. 1#.,/ percent ). 1#.-2 percent
Essay Questions
2-. (efine and e7plain the three forms of market efficiency. The current stock price reflects the follo in" information for each form of efficiency:
Eeedback: Defer to section 12./
AACSB: 'eflecti e thin(ing Bloom's: -no.le*ge Difficulty: Basic Learning Objecti e: !"#+ Section: !"$1 &opic: 8ar(et efficiency
12-/4
2#. $hat are the t o primary lessons learned from capital market history% @se historical information to 8ustify that these lessons are correct. Eirst, there is a re ard for bearin" risk, and second, the "reater the risk, the "reater the potential re ard. &s e!idence, students should pro!ide a brief discussion of the historical rates of return and the related standard de!iations of the !arious asset classes discussed in the te7t. Eeedback: Defer to sections 12., and 12.-
AACSB: 'eflecti e thin(ing Bloom's: Comprehension Difficulty: )nterme*iate Learning Objecti e: !"#" an* !"#% Section: !"$% an* !"$+ &opic: Capital mar(et history
2/. Ho can an in!estor lose money on a stock hile makin" money on a bond in!estment if there is a re ard for bearin" risk% &ren*t stocks riskier than bonds% There is a re ard for bearin" risk o!er the lon"-term. Ho e!er, the nature of risk implies the returns on a hi"h risk security ill be more !olatile than the returns on a lo risk security. Thus, stocks can produce lo er returns in the short run. 9t is the acceptance of this risk that 8ustifies the potential lon"-term re ard. Eeedback: Defer to section 12.,
AACSB: 'eflecti e thin(ing Bloom's: Analysis Difficulty: )nterme*iate Learning Objecti e: !"#" Section: !"$% &opic: 'is( an* return
12-06
20. Sha n earned an a!era"e return of 1-./ percent on his in!estments o!er the past 26 years hile the SI3 #66, a measure of the o!erall market, only returned an a!era"e of 1,.4 percent. )7plain ho this can occur if the stock market is efficient. &n in!estor can purchase securities that ha!e a hi"her le!el of risk than the o!erall market. 9n an efficient market, these securities ill earn a hi"her return o!er the lon"-term as compensation for the assumption of the increased risk. This is the first lesson of the capital markets: There is a re ard for bearin" risk. Eeedback: Defer to section 12.,
AACSB: 'eflecti e thin(ing Bloom's: Analysis Difficulty: )nterme*iate Learning Objecti e: !"#" an* !"#% Section: !"$% &opic: 'is( an* return
22. Bou ant to in!est in an inde7 fund hich directly correlates to the o!erall @.S. stock market. Ho can you determine if the market risk premium you are e7pectin" to earn is reasonable for the lon"-term% Bou could compare your e7pectation to the historical market risk premium for the @nited States, as ell as other industriali1ed countries, reali1in" of course, that the future ill not be e7actly like the past. <e!ertheless, this should indicate hether or not your e7pectation is at least reasonable. Eeedback: Defer to section 12.-
AACSB: 'eflecti e thin(ing Bloom's: Analysis Difficulty: )nterme*iate Learning Objecti e: !"#% Section: !"$+ &opic: 3istorical ris( premium
12-01

24. Suppose a stock had an initial price of 526 per share, paid a di!idend of 51.,# per share durin" the year, and had an endin" share price of 520. $hat as the capital "ains yield% &. 1.## percent '. 1./4 percent C. 2.6# percent D. 2.0# percent ). 16.-- percent Capital "ains yield K =520 - 526?L526 K 2.0# percent
AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#" Learning Objecti e: !"#! Section: !"$! &opic: Capital gains yiel*
46. Suppose you bou"ht a 1# percent coupon bond one year a"o for 54#6. The face !alue of the bond is 51,666. The bond sells for 542# today. 9f the inflation rate last year as 4 percent, hat as your total real rate of return on this in!estment% &. --.22 percent '. -#.,2 percent C. 4./1 percent (. 4.02 percent ). 16.-0 percent <ominal return K =542# - 54#6 > 51#6?L54#6 K 6.14-0 Deal return K M=1 > 6.14-0?L=1 > 6.64?N - 1 K 4./1 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#+ Learning Objecti e: !"#! Section: !"$% &opic: Nominal an* real returns
12-02
41. Calculate the standard de!iation of the follo in" rates of return:
&. 16.04 percent '. 12./6 percent C. 1,.-2 percent (. 1-.-2 percent E. 1#.62 percent &!era"e return K =6.60 > 6.2# > 6.1- - 6.1# > 6.1/?L# K 6.64Standard de!iation K M1L=# - 1?N M=6.60 - 6.64-?2 > =6.2# - 6.64-?2 >=6.1- - 6.64-?2 >=-6.1# 6.64-?2 > =6.1/ - 6.64-?2N K 1#.62 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#: Learning Objecti e: !"#! Section: !"$+ &opic: Stan*ar* *e iation
12-0,
42. Bou*!e obser!ed the follo in" returns on Crash-n-'urn Computer*s stock o!er the past fi!e years: 2 percent, -12 percent, 20 percent, 22 percent, and 12 percent. $hat is the !ariance of these returns% &. 6.62606 B. 6.62#22 C. 6.6102# (. 6.61/2). 6.62/,, &!era"e K =6.62 - 6.12 > 6.20 > 6.22 > 6.12?L# K 6.11;ariance K M1L=# - 1?N M=6.62 - 6.11-?2 > =-6.12 - 6.11-?2 > =6.20 - 6.11-?2 > =6.22 - 6.11-?2 > =6.12 - 6.11-?2N K 6.62#22
AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#; Learning Objecti e: !"#! Section: !"$+ &opic: ,ariance
4,. Bou*!e obser!ed the follo in" returns on Crash-n-'urn Computer*s stock o!er the past fi!e years: , percent, -16 percent, 2- percent, 22 percent, and 12 percent. Suppose the a!era"e inflation rate o!er this time period as ,./ percent and the a!era"e T-bill rate as -.2 percent. 'ased on this information, hat as the a!era"e nominal risk premium% &. #.1# percent B. #.-6 percent C. /.61 percent (. /.,0 percent ). /./6 percent &!era"e return K =6.6, - 6.16 > 6.2- > 6.22 > 6.12?L# K 6.162 &!era"e nominal risk premium K 6.162 - 6.6-2 K #.-6 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#!< Learning Objecti e: !"#! Section: !"$% &opic: Nominal ris( premium
12-0-
4-. Bou bou"ht one of Hreat $hite Shark Depellant Co.*s 16 percent coupon bonds one year a"o for 50/6. These bonds pay annual payments, ha!e a face !alue of 51,666, and mature 1years from no . Suppose you decide to sell your bonds today hen the re+uired return on the bonds is 1- percent. The inflation rate o!er the past year as ,.0 percent. $hat as your total real return on this in!estment% &. 2.40 percent B. 4.11 percent C. 4.12 percent (. 4.-- percent ). 4.#2 percent
<ominal return K =50#4.42 - 50/6 > 5166?L50/6 K 6.1,1-0 Deal return K M=1 > 6.1,1-0?L=1 > 6.6,0?N - 1 K 4.11 percent
AACSB: Analytic Bloom's: Analysis Difficulty: )nterme*iate 2OC 9: !"#!% Learning Objecti e: !"#! Section: !"$% &opic: 'eal return
12-0#
4#. Bou find a certain stock that had returns of - percent, -# percent, -1# percent, and 1/ percent for four of the last fi!e years. The a!era"e return of the stock for the #-year period as 1, percent. $hat is the standard de!iation of the stock*s returns for the fi!e-year period% &. 21.,4 percent '. 2-.42 percent C. 20.1/ percent D. ,1.2, percent ). ,-.62 percent Deturn for missin" year: 6.6- - 6.6# - 6.1# > 6.1/ > 7 K 6.1, #G 7 K /# percent Std de! K M1L=# - 1?N M=6.6- - 6.1,?2 > =-6.6# - 6.1,?2 > =-6.1# - 6.1,?2 > =6.1/ - 6.1,?2 > =6./# - 6.1,?2 K ,1.2, percent
AACSB: Analytic Bloom's: Analysis Difficulty: )nterme*iate 2OC 9: !"#!+ Learning Objecti e: !"#% Section: !"$+ &opic: Stan*ar* *e iation
4/. & stock had returns of 12 percent, 1/ percent, 1, percent, 14 percent, 1# percent, and -/ percent o!er the last si7 years. $hat is the "eometric a!era"e return on the stock for this period% &. 16.46 percent B. 11.12 percent C. 1,.#/ percent (. 1-.0/ percent ). 1#.61 percent Heometric a!era"e K =1.12 1.1/ 1.1, 1.14 1.1# 6.4-?1L/ - 1 K 11.12 percent
AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate 2OC 9: !"#!/ Learning Objecti e: !"#! Section: !"$/ &opic: 0eometric a erage return
12-0/
40. &ssume that the returns from an asset are normally distributed. The a!era"e annual return for the asset is 12.1 percent and the standard de!iation of the returns is ,2.# percent. $hat is the appro7imate probability that your money ill triple in !alue in a sin"le year% A. less than 6.# percent '. less than 1 percent but "reater than 6.# percent C. less then 2.# percent but "reater than 1 percent (. less than # percent but "reater than 2.# percent ). less than 16 percent but "reater than # percent The upper tail of the 44 percent ran"e K 6.121 > =, 6.,2#? K 1.1#/ K 11#./ percent, hich is less than the 266 percent re+uired to triple your money. Thus, the probability of occurrence is less than 6.# percent.
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 2OC 9:!"#!: Learning Objecti e: !"#% Section: !"$+ &opic: 7robability ranges
42. A!er a ,--year period an asset had an arithmetic return of 1, percent and a "eometric return of 16.# percent. @sin" 'lume*s formula, hat is your best estimate of the future annual returns o!er the ne7t 16 years% &. 11.12 percent '. 11.20 percent C. 11.2- percent D. 12.,2 percent ). 12.-/ percent
AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate 2OC 9: !"#"< Learning Objecti e: !"#! Section: !"$/ &opic: Blume's formula
12-00

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Chapter 12 - Some Lessons from Capital Market History

Chapter 12 Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

2-. (efine and e7plain the three forms of market efficiency.

Chapter 12 - Some Lessons from Capital Market History

Multiple Choice Questions

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 Some Lessons from Capital Market History &ns er Jey

Multiple Choice Questions

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 - Some Lessons from Capital Market History