Question 1

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

Accepted Answer

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

Question 2

A stock had returns of 16 percent,4 percent,8 percent,14 percent,-9 percent,and -5 percent over the past six years.What is the geometric average return for this time period?

Accepted Answer

A) 4.26 percent 
B) 4.67 percent 
C) 5.13 percent 
D) 5.39 percent 
E) 5.60 percent

Question 3

A stock had returns of 12 percent,16 percent,10 percent,19 percent,15 percent,and -6 percent over the last six years.What is the geometric average return on the stock for this period?

Accepted Answer

A) 10.90 percent 
B) 10.68 percent 
C) 13.56 percent 
D) 14.76 percent 
E) 15.01 percent

Question 4

Which one of the following statements best defines the efficient market hypothesis?

Accepted Answer

A) Efficient markets limit competition. 
B) Security prices in efficient markets remain steady as new information becomes available. 
C) Mispriced securities are common in efficient markets. 
D) All securities in an efficient market are zero net present value investments. 
E) Profits are removed as a market incentive when markets become efficient.

Question 5

One year ago,you purchased 500 shares of Best Wings,Inc.stock at a price of $9.75 a share.The company pays an annual dividend of $0.10 per share.Today,you sold all of your shares for $15.60 a share.What is your total percentage return on this investment?

Accepted Answer

A) 38.46 percent 
B) 39.10 percent 
C) 39.72 percent 
D) 62.50 percent 
E) 61.03 percent

Question 6

Last year,you purchased 500 shares of Analog Devices,Inc.stock for $11.16 a share.You have received a total of $120 in dividends and $7,190 from selling the shares.What is your capital gains yield on this stock?

Accepted Answer

A) 26.70 percent 
B) 26.73 percent 
C) 28.85 percent 
D) 29.13 percent 
E) 31.02 percent

Question 7

You want to invest in an index fund which directly correlates to the overall U.S.stock market.How can you determine if the market risk premium you are expecting to earn is reasonable for the long-term?

Accepted Answer

The answer of You want to invest in an index...

Question 8

Which one of the following statements is correct?

Accepted Answer

A) The greater the volatility of returns, the greater the risk premium. 
B) The lower the volatility of returns, the greater the risk premium. 
C) The lower the average return, the greater the risk premium. 
D) The risk premium is unrelated to the average rate of return. 
E) The risk premium is not affected by the volatility of returns.

Question 9

Which of the following statements are true based on the historical record for 1926-2010?
I.Risk and potential reward are inversely related.
II.Risk-free securities produce a positive real rate of return each year.
III.Returns are more predictable over the short-term than they are over the long-term.
IV.Bonds are generally a safer investment than are stocks.

Accepted Answer

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

Question 10

Which one of the following statements concerning U.S.Treasury bills is correct for the period 1926- 2010?

Accepted Answer

A) The annual rate of return always exceeded the annual inflation rate. 
B) The average risk premium was 0.7 percent. 
C) The annual rate of return was always positive. 
D) The average excess return was 1.1 percent. 
E) The average real rate of return was zero.

Question 11

Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

Accepted Answer

A) overestimate; overestimate 
B) overestimate; underestimate 
C) underestimate; overestimate 
D) underestimate; underestimate 
E) accurately; accurately

Question 12

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 3 percent,-10 percent,24 percent,22 percent,and 12 percent.Suppose the average inflation rate over this time period was 3.6 percent and the average T-bill rate was 4.8 percent.Based on this information,what was the average nominal risk premium?

Accepted Answer

A) 5.15 percent 
B) 5.40 percent 
C) 6.01 percent 
D) 6.37 percent 
E) 6.60 percent

Question 13

A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 33 years.What is the estimated average rate of return for the next 6 years based on Blume's formula?

Accepted Answer

A) 14.79 percent 
B) 14.96 percent 
C) 15.28 percent 
D) 15.36 percent 
E) 15.42 percent

Question 14

Assume that the returns from an asset are normally distributed.The average annual return for the asset is 18.1 percent and the standard deviation of the returns is 32.5 percent.What is the approximate probability that your money will triple in value in a single year?

Accepted Answer

A) less than 0.5 percent 
B) less than 1 percent but greater than 0.5 percent 
C) less then 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 15

You just sold 600 shares of Wesley,Inc.stock at a price of $32.04 a share.Last year,you paid $30.92 a share to buy this stock.Over the course of the year,you received dividends totaling $1.20 per share.What is your total capital gain on this investment?

Accepted Answer

A) -$618 
B) -$672 
C) $672 
D) $618 
E) $720

Question 16

Four months ago,you purchased 1,500 shares of Lakeside Bank stock for $11.20 a share.You have received dividend payments equal to $0.25 a share.Today,you sold all of your shares for $8.60 a share.What is your total dollar return on this investment?

Accepted Answer

A) -$3,900 
B) -$3,525 
C) -$3,150 
D) -$2,950 
E) -$2,875

Question 17

You find a certain stock that had returns of 4 percent,-5 percent,-15 percent,and 16 percent for four of the last five years.The average return of the stock for the 5-year period was 13 percent.What is the standard deviation of the stock's returns for the five-year period?

Accepted Answer

A) 21.39 percent 
B) 24.98 percent 
C) 27.16 percent 
D) 31.23 percent 
E) 34.02 percent

Question 18

Small-company stocks,as the term is used in the textbook,are best defined as the:

Accepted Answer

A) 500 newest corporations in the U.S. 
B) firms whose stock trades OTC. 
C) smallest twenty percent of the firms listed on the NYSE. 
D) smallest twenty-five percent of the firms listed on NASDAQ. 
E) firms whose stock is listed on NASDAQ.

Exam 12: Some Lessons From Capital Market History