Question 1

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) 3.89; 3.62 
B) 3.89; 4.60 
C) 3.62; 3.89 
D) 4.60; 3.62 
E) 4.60; 3.89

Question 2

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest.

Accepted Answer

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

Question 3

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities.Which one of the following terms best defines that market?

Accepted Answer

A) riskless market 
B) evenly distributed market 
C) zero volatility market 
D) Blume's market 
E) efficient capital market

Question 4

Calculate the standard deviation of the following rates of return:

Accepted Answer

A) 10.79 percent 
B) 12.60 percent 
C) 13.48 percent 
D) 14.42 percent 
E) 15.08 percent

Question 5

The excess return is computed as the:

Accepted Answer

A) 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. 
D) the risk-free rate plus the inflation rate. 
E) risk-free rate minus the inflation rate.

Question 6

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.

Question 7

The real rate of return on a stock is approximately equal to the nominal rate of return:

Accepted Answer

A) multiplied by (1 + inflation rate). 
B) plus the inflation rate. 
C) minus the inflation rate. 
D) divided by (1 + inflation rate). 
E) divided by (1 - inflation rate).

Question 8

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.

Question 9

Which of the following statements related to market efficiency tend to be supported by current evidence?
I.Markets tend to respond quickly to new information.
II.It is difficult for investors to earn abnormal returns.
III.Short-run prices are difficult to predict accurately based on public information.
IV.Markets are most likely weak form efficient.

Accepted Answer

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

Question 10

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

Question 11

One year ago,you purchased a stock at a price of $33.49.The stock pays quarterly dividends of $0.20 per share.Today,the stock is selling for $28.20 per share.What is your capital gain on this investment?

Accepted Answer

A) -$5.49 
B) -$5.29 
C) -$4.76 
D) -$4.16 
E) -$5.09

Question 12

A stock has annual returns of 6 percent,14 percent,-3 percent,and 2 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) 4.57; 4.75 
B) 4.75; 4.57 
C) 6.33; 6.19 
D) 6.19; 6.33 
E) 6.33; 6.33

Question 13

The primary purpose of Blume's formula is to:

Accepted Answer

A) compute an accurate historical rate of return. 
B) determine a stock's true current value. 
C) consider compounding when estimating a rate of return. 
D) determine the actual real rate of return. 
E) project future rates of return.

Question 14

Today,you sold 200 shares of Indian River Produce stock.Your total return on these shares is 6.2 percent.You purchased the shares one year ago at a price of $31.10 a share.You have received a total of $100 in dividends over the course of the year.What is your capital gains yield on this investment?

Accepted Answer

A) 3.68 percent 
B) 4.59 percent 
C) 5.67 percent 
D) 7.26 percent 
E) 7.41 percent

Question 15

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. 
E) New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

Question 16

Which one of the following statements related to capital gains is correct?

Accepted Answer

A) The capital gains yield includes only realized capital gains. 
B) An increase in an unrealized capital gain will increase the capital gains yield. 
C) The capital gains yield must be either positive or equal to zero. 
D) The capital gains yield is expressed as a percentage of the sales price. 
E) The capital gains yield represents the total return earned by an investor.

Question 17

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price.She received a total of $0.75 in dividends.Which one of the following statements is correct in relation to this investment?

Accepted Answer

A) The dividend yield is expressed as a percentage of the selling price. 
B) The capital gain would have been less had Stacy not received the dividends. 
C) The total dollar return per share is $3. 
D) The capital gains yield is positive. 
E) The dividend yield is greater than the capital gains yield.

Question 18

The return earned in an average year over a multi-year period is called the _____ average return.

Accepted Answer

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

Question 19

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?

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

Question 20

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

Exam 12: Some Lessons From Capital Market History

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.