Question 1

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

Accepted Answer

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

Question 2

Which one of the following is most indicative of a totally efficient stock market?

Accepted Answer

A)  Extraordinary returns earned on a routine basis 
B)  Positive net present values on stock investments over the long-term 
C)  Zero net present values for all stock investments 
D)  Arbitrage opportunities which develop on a routine basis 
E)  Realizing negative returns on a routine basis 
A)  Extraordinary returns earned on a routine basis 
B)  Positive net present values on stock investments over the long-term 
C)  Zero net present values for all stock investments 
D)  Arbitrage opportunities which develop on a routine basis 
E)  Realizing negative returns on a routine basis

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

A)  U.S. Treasury bill returns never exceeded a return of 9 percent in any one year. 
B)  U.S. Treasury bills had an annual return in excess of 10 percent in three or more years. 
C)  Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. 
D)  Long-term government bonds outperformed U.S. Treasury bills every year during the period. 
E)  National deflation occurred in at least one year during every decade during the period. 
A)  U.S. Treasury bill returns never exceeded a return of 9 percent in any one year. 
B)  U.S. Treasury bills had an annual return in excess of 10 percent in three or more years. 
C)  Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. 
D)  Long-term government bonds outperformed U.S. Treasury bills every year during the period. 
E)  National deflation occurred in at least one year during every decade during the period.

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

A stock had returns of 3 percent, 12 percent, 26 percent, −14 percent, and −1 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year?

Accepted Answer

A)  Approximately .1 percent 
B)  Approximately 5 percent 
C)  Approximately 2.5 percent 
D)  Approximately .5 percent 
E)  Approximately 16 percent 
A)  Approximately .1 percent 
B)  Approximately 5 percent 
C)  Approximately 2.5 percent 
D)  Approximately .5 percent 
E)  Approximately 16 percent

Question 8

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

Accepted Answer

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

Question 9

Which one of the following best defines the variance of an investment's annual returns over a number of years?

Accepted Answer

A)  The average squared difference between the arithmetic and the geometric average annual returns 
B)  The squared summation of the differences between the actual returns and the average geometric return 
C)  The average difference between the annual returns and the average return for the period 
D)  The difference between the arithmetic average and the geometric average return for the period 
E)  The average squared difference between the actual returns and the arithmetic average return 
A)  The average squared difference between the arithmetic and the geometric average annual returns 
B)  The squared summation of the differences between the actual returns and the average geometric return 
C)  The average difference between the annual returns and the average return for the period 
D)  The difference between the arithmetic average and the geometric average return for the period 
E)  The average squared difference between the actual returns and the arithmetic average return

Question 10

Over the past 12 years, the common stock of The Flower Shoppe has produced an arithmetic average return of 12.6 percent and a geometric average return of 12.3 percent. What is the projected return on this stock for the next five years according to Blume's formula?

Accepted Answer

A)  11.70 percent 
B)  11.89 percent 
C)  12.49 percent 
D)  12.03 percent 
E)  12.12 percent 
A)  11.70 percent 
B)  11.89 percent 
C)  12.49 percent 
D)  12.03 percent 
E)  12.12 percent

Question 11

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

Accepted Answer

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

Question 12

Assume the returns from an asset are normally distributed. The average annual return for the asset is 17.4 percent and the standard deviation of the returns is 27.5 percent. What is the approximate probability that your money will double in value in a single year?

Accepted Answer

A)  Close to .5 percent 
B)  Close to 1 percent 
C)  Less than 2.5 percent but greater than 1 percent 
D)  Less than 5 percent but greater than 2.5 percent 
E)  Less than 10 percent but greater than 5 percent 
A)  Close to .5 percent 
B)  Close to 1 percent 
C)  Less than 2.5 percent but greater than 1 percent 
D)  Less than 5 percent but greater than 2.5 percent 
E)  Less than 10 percent but greater than 5 percent

Question 13

A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent.

Accepted Answer

A)  5.80; 4.86 
B)  5.80; 5.03 
C)  5.62; 5.03 
D)  5.40; 5.03 
E)  5.40; 4.86 
A)  5.80; 4.86 
B)  5.80; 5.03 
C)  5.62; 5.03 
D)  5.40; 5.03 
E)  5.40; 4.86

Question 14

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

Accepted Answer

A)  was unaffected by the announcement. 
B)  increased proportionately with the dividend decrease. 
C)  decreased proportionately with the dividend decrease. 
D)  decreased by $.03 per share. 
E)  increased by $.03 per share. 
A)  was unaffected by the announcement. 
B)  increased proportionately with the dividend decrease. 
C)  decreased proportionately with the dividend decrease. 
D)  decreased by $.03 per share. 
E)  increased by $.03 per share.

Question 15

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

Accepted Answer

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

Question 16

Which one of the following correctly describes the dividend yield?

Accepted Answer

A)  Next year's annual dividend divided by today's stock price 
B)  This year's annual dividend divided by today's stock price 
C)  This year's annual dividend divided by next year's expected stock price 
D)  Next year's annual dividend divided by this year's annual dividend 
E)  The increase in next year's dividend over this year's dividend divided by this year's dividend 
A)  Next year's annual dividend divided by today's stock price 
B)  This year's annual dividend divided by today's stock price 
C)  This year's annual dividend divided by next year's expected stock price 
D)  Next year's annual dividend divided by this year's annual dividend 
E)  The increase in next year's dividend over this year's dividend divided by this year's dividend

Question 17

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

Accepted Answer

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

Question 18

A stock had returns of 14 percent, 13 percent, −10 percent, and 7 percent for the past four years. Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year?

Accepted Answer

A)  Greater than .5 but less than 1.0 percent 
B)  Greater than 1 percent but less than 2.5 percent 
C)  Greater than 2.5 percent but less than 16 percent 
D)  Greater than 84 percent but less than 97.5 percent 
E)  Greater than 95 percent 
A)  Greater than .5 but less than 1.0 percent 
B)  Greater than 1 percent but less than 2.5 percent 
C)  Greater than 2.5 percent but less than 16 percent 
D)  Greater than 84 percent but less than 97.5 percent 
E)  Greater than 95 percent

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer

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

Exam 12: Some Lessons from Capital Market History

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

Which one of the following is most indicative of a totally efficient stock market?

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

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

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

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

A stock had returns of 3 percent, 12 percent, 26 percent, −14 percent, and −1 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year?

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

Which one of the following best defines the variance of an investment's annual returns over a number of years?

Over the past 12 years, the common stock of The Flower Shoppe has produced an arithmetic average return of 12.6 percent and a geometric average return of 12.3 percent. What is the projected return on this stock for the next five years according to Blume's formula?

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

Assume the returns from an asset are normally distributed. The average annual return for the asset is 17.4 percent and the standard deviation of the returns is 27.5 percent. What is the approximate probability that your money will double in value in a single year?

A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent.

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

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

Which one of the following correctly describes the dividend yield?

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

A stock had returns of 14 percent, 13 percent, −10 percent, and 7 percent for the past four years. Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year?

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

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

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is percent while the geometric average return for the period is percent.