Question 1

Efficient financial markets fluctuate continuously because:

Accepted Answer

A) the markets are continually reacting to old information as that information is absorbed. 
B) the markets are continually reacting to new information. 
C) arbitrage trading is limited. 
D) current trading systems require human intervention. 
E) investments produce varying levels of net present values. 
A) the markets are continually reacting to old information as that information is absorbed. 
B) the markets are continually reacting to new information. 
C) arbitrage trading is limited. 
D) current trading systems require human intervention. 
E) investments produce varying levels of net present values.

Question 2

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 3

A stock had annual returns of 3.6 percent,-8.7 percent,5.6 percent,and 12.5 percent over the past four years.Which one of the following best describes the probability that this stock will produce a return of 22 percent or more in a single year?

Accepted Answer

A) less than 0.1 percent 
B) less than 0.5 percent but greater than 0.1 percent 
C) less than 1.0 percent but greater the 0.5 percent 
D) less than 2.5 percent but greater than 0.5 percent 
E) less than 5 percent but greater than 2.5 percent 
A) less than 0.1 percent 
B) less than 0.5 percent but greater than 0.1 percent 
C) less than 1.0 percent but greater the 0.5 percent 
D) less than 2.5 percent but greater than 0.5 percent 
E) less than 5 percent but greater than 2.5 percent

Question 4

Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500,a measure of the overall market,only returned an average of 13.9 percent.Explain how this can occur if the stock market is efficient.

Accepted Answer

An investor can purchase securities that

Question 5

Last year,you purchased a stock at a price of $47.10 a share.Over the course of the year,you received $2.40 per share in dividends while inflation averaged 3.4 percent.Today,you sold your shares for $49.50 a share.What is your approximate real rate of return on this investment?

Accepted Answer

A) 6.30 percent 
B) 6.79 percent 
C) 7.18 percent 
D) 9.69 percent 
E) 10.19 percent 
A) 6.30 percent 
B) 6.79 percent 
C) 7.18 percent 
D) 9.69 percent 
E) 10.19 percent

Question 6

Suppose you bought a 10 percent coupon bond one year ago for $950.The face value of the bond is $1,000.The bond sells for $985 today.If the inflation rate last year was 9 percent,what was your total real rate of return on this investment?

Accepted Answer

A) -4.88 percent 
B) -5.32 percent 
C) 4.78 percent 
D) 9.78 percent 
E) 10.47 percent 
A) -4.88 percent 
B) -5.32 percent 
C) 4.78 percent 
D) 9.78 percent 
E) 10.47 percent

Question 7

You bought one of Great White Shark Repellant Co.'s 10 percent coupon bonds one year ago for $815.These bonds pay annual payments,have a face value of $1,000,and mature 14 years from now.Suppose you decide to sell your bonds today when the required return on the bonds is 14 percent.The inflation rate over the past year was 3.7 percent.What was your total real return on this investment?

Accepted Answer

A) 2.97 percent 
B) 1.75 percent 
C) 1.18 percent 
D) 3.44 percent 
E) 2.58 percent 
A) 2.97 percent 
B) 1.75 percent 
C) 1.18 percent 
D) 3.44 percent 
E) 2.58 percent

Question 8

Which one of the following time periods is associated with high rates of inflation?

Accepted Answer

A) 1929-1933 
B) 1957-1961 
C) 1978-1981 
D) 1992-1996 
E) 2001-2005 
A) 1929-1933 
B) 1957-1961 
C) 1978-1981 
D) 1992-1996 
E) 2001-2005

Question 9

The historical record for the period 1926-2010 supports which one of the following statements?

Accepted Answer

A) A higher-risk security will provide a higher rate of return next year than will a lower-risk security. 
B) If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. 
C) Increased long-run potential returns are obtained by lowering risks. 
D) It is possible for small-company stocks to more than double in value in any one given year. 
E) Inflation was positive each year throughout the period of 1926-2010. 
A) A higher-risk security will provide a higher rate of return next year than will a lower-risk security. 
B) If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. 
C) Increased long-run potential returns are obtained by lowering risks. 
D) It is possible for small-company stocks to more than double in value in any one given year. 
E) Inflation was positive each year throughout the period of 1926-2010.

Question 10

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 11

Last year,T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent.Which one of the following terms refers to the difference between these two rates of return?

Accepted Answer

A) risk premium 
B) geometric return 
C) arithmetic 
D) standard deviation 
E) variance 
A) risk premium 
B) geometric return 
C) arithmetic 
D) standard deviation 
E) variance

Question 12

The average compound return earned per year over a multi-year 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 13

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 0.5 but less than 1.0 percent 
B) greater than 1.0 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 0.5 but less than 1.0 percent 
B) greater than 1.0 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 14

What is the amount of the risk premium on a U.S.Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

Accepted Answer

A) 0.00 percent 
B) 2.80 percent 
C) 5.55 percent 
D) 8.35 percent 
E) 11.15 percent 
A) 0.00 percent 
B) 2.80 percent 
C) 5.55 percent 
D) 8.35 percent 
E) 11.15 percent

Question 15

What was the average rate of inflation over the period of 1926-2010?

Accepted Answer

A) less than 2.0 percent 
B) between 2.0 and 2.5 percent 
C) between 2.5 and 3.0 percent 
D) between 3.0 and 3.5 percent 
E) greater than 3.5 percent 
A) less than 2.0 percent 
B) between 2.0 and 2.5 percent 
C) between 2.5 and 3.0 percent 
D) between 3.0 and 3.5 percent 
E) greater than 3.5 percent

Question 16

Your friend is the owner of a stock which had returns of 25 percent,-36 percent,1 percent,and 16 percent for the past four years.Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year.Based on these returns,what is the probability that your friend is correct?

Accepted Answer

A) less than 0.5 percent 
B) greater than 0.5 percent but less than 1.0 percent 
C) greater than 1.0 percent but less than 2.5 percent 
D) greater than 2.5 percent but less than 16 percent 
E) greater than 16.0 percent 
A) less than 0.5 percent 
B) greater than 0.5 percent but less than 1.0 percent 
C) greater than 1.0 percent but less than 2.5 percent 
D) greater than 2.5 percent but less than 16 percent 
E) greater than 16.0 percent

Question 17

A year ago,you purchased 300 shares of Stellar Wood Products,Inc.stock at a price of $8.62 per share.The stock pays an annual dividend of $0.10 per share.Today,you sold all of your shares for $4.80 per share.What is your total dollar return on this investment?

Accepted Answer

A) -$382 
B) -$1,372 
C) -$1,528 
D) -$1,116 
E) -$1,360 
A) -$382 
B) -$1,372 
C) -$1,528 
D) -$1,116 
E) -$1,360

Question 18

How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk?
 Aren't stocks riskier than bonds?

Accepted Answer

There is a reward for bearing risk over

Question 19

Which of the following statements is correct in relation to a stock investment?
I.The capital gains yield can be positive,negative,or zero.
II.The dividend yield can be positive,negative,or zero.
III.The total return can be positive,negative,or zero.
IV.Neither the dividend yield nor the total return can be negative.

Accepted Answer

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

Question 20

Which one of the following earned the highest risk premium over the period 1926-2010?

Accepted Answer

A) long-term corporate bonds 
B) U.S. Treasury bills 
C) small-company stocks 
D) large-company stocks 
E) long-term government bonds 
A) long-term corporate bonds 
B) U.S. Treasury bills 
C) small-company stocks 
D) large-company stocks 
E) long-term government bonds

Exam 12: Some Lessons From Capital Market History

Efficient financial markets fluctuate continuously because:

To convince investors to accept greater volatility,you must:

A stock had annual returns of 3.6 percent,-8.7 percent,5.6 percent,and 12.5 percent over the past four years.Which one of the following best describes the probability that this stock will produce a return of 22 percent or more in a single year?

Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500,a measure of the overall market,only returned an average of 13.9 percent.Explain how this can occur if the stock market is efficient.

Last year,you purchased a stock at a price of $47.10 a share.Over the course of the year,you received $2.40 per share in dividends while inflation averaged 3.4 percent.Today,you sold your shares for $49.50 a share.What is your approximate real rate of return on this investment?

Suppose you bought a 10 percent coupon bond one year ago for $950.The face value of the bond is $1,000.The bond sells for $985 today.If the inflation rate last year was 9 percent,what was your total real rate of return on this investment?

Which one of the following time periods is associated with high rates of inflation?

The historical record for the period 1926-2010 supports which one of the following statements?

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

Last year,T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent.Which one of the following terms refers to the difference between these two rates of return?

The average compound return earned per year over a multi-year period is called the _____ average return.

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?

What is the amount of the risk premium on a U.S.Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

What was the average rate of inflation over the period of 1926-2010?

A year ago,you purchased 300 shares of Stellar Wood Products,Inc.stock at a price of $8.62 per share.The stock pays an annual dividend of $0.10 per share.Today,you sold all of your shares for $4.80 per share.What is your total dollar return on this investment?

How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?

Which one of the following earned the highest risk premium over the period 1926-2010?

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