Question 1

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

Accepted Answer

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

Question 2

A stock had annual returns of 6 percent, 13 percent, 11 percent, −8 percent, and 3 percent for the past five years, respectively. What is the standard deviation of returns for this stock?

Accepted Answer

A)  10.79 percent 
B)  12.60 percent 
C)  6.48 percent 
D)  14.42 percent 
E)  8.28 percent 
A)  10.79 percent 
B)  12.60 percent 
C)  6.48 percent 
D)  14.42 percent 
E)  8.28 percent

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

Inside information has the least value when financial markets are:

Accepted Answer

A)  weak form efficient. 
B)  semiweak form efficient. 
C)  semistrong form efficient. 
D)  strong form efficient. 
E)  inefficient. 
A)  weak form efficient. 
B)  semiweak form efficient. 
C)  semistrong form efficient. 
D)  strong form efficient. 
E)  inefficient.

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

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

Question 10

A stock had annual returns of 5.1 percent, 12.2 percent, −3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent.

Accepted Answer

A)  5.73; 5.06 
B)  5.73; 5.55 
C)  5.91; 5.74 
D)  5.91; 5.62 
E)  5.73; 8.92 
A)  5.73; 5.06 
B)  5.73; 5.55 
C)  5.91; 5.74 
D)  5.91; 5.62 
E)  5.73; 8.92

Question 11

A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 15 years. What is the estimated average rate of return for the next six years based on Blume's formula?

Accepted Answer

A)  14.79 percent 
B)  14.96 percent 
C)  15.28 percent 
D)  15.18 percent 
E)  15.42 percent 
A)  14.79 percent 
B)  14.96 percent 
C)  15.28 percent 
D)  15.18 percent 
E)  15.42 percent

Question 12

To convince investors to accept greater volatility, you must:

Accepted Answer

A)  decrease the risk premium. 
B)  increase the risk premium. 
C)  decrease the real return. 
D)  decrease the risk-free rate. 
E)  increase the risk-free rate. 
A)  decrease the risk premium. 
B)  increase the risk premium. 
C)  decrease the real return. 
D)  decrease the risk-free rate. 
E)  increase the risk-free rate.

Question 13

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

Accepted Answer

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

Question 14

Over a 25-year period an asset had an arithmetic return of 13.1 percent and a geometric return of 12.6 percent. Using Blume's formula, what is your best estimate of the future annual returns over the next 10 years?

Accepted Answer

A)  11.18 percent 
B)  13.04 percent 
C)  11.84 percent 
D)  12.91 percent 
E)  12.46 percent 
A)  11.18 percent 
B)  13.04 percent 
C)  11.84 percent 
D)  12.91 percent 
E)  12.46 percent

Question 15

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

Accepted Answer

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

Question 16

Standard deviation is a measure of which one of the following?

Accepted Answer

A)  Average rate of return 
B)  Volatility 
C)  Probability 
D)  Risk premium 
E)  Real returns 
A)  Average rate of return 
B)  Volatility 
C)  Probability 
D)  Risk premium 
E)  Real returns

Question 17

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

Accepted Answer

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

Question 18

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

Accepted Answer

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

Question 19

Which one of the following statements is correct concerning market efficiency?

Accepted Answer

A)  Real asset markets are more efficient than financial markets. 
B)  If a market is efficient, arbitrage opportunities should be common. 
C)  In an efficient market, some market participants will have an advantage over others. 
D)  A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. 
E)  New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market. 
A)  Real asset markets are more efficient than financial markets. 
B)  If a market is efficient, arbitrage opportunities should be common. 
C)  In an efficient market, some market participants will have an advantage over others. 
D)  A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. 
E)  New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market.

Question 20

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

Accepted Answer

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

Exam 12: Some Lessons from Capital Market History

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

A stock had annual returns of 6 percent, 13 percent, 11 percent, −8 percent, and 3 percent for the past five years, respectively. What is the standard deviation of returns for this stock?

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

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

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

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

Inside information has the least value when financial markets are:

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

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

A stock had annual returns of 5.1 percent, 12.2 percent, −3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent.

A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 15 years. What is the estimated average rate of return for the next six years based on Blume's formula?

To convince investors to accept greater volatility, you must:

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

Over a 25-year period an asset had an arithmetic return of 13.1 percent and a geometric return of 12.6 percent. Using Blume's formula, what is your best estimate of the future annual returns over the next 10 years?

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

Standard deviation is a measure of which one of the following?

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

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

Which one of the following statements is correct concerning market efficiency?

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 had annual returns of 5.1 percent, 12.2 percent, −3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is percent while the geometric average return for the period is percent.