Fundamentals of Finance Chapter 12 Test Bank

Chapter 12 - Some Lessons from Capital Market History

Chapter 12 Some Lessons from Capital Market History

Chapter 12 Some Lessons from Capital Market History Answer Answer Key Key

Multiple Choice Questions

1. Last year, T-bills T-bills retrne! 2 per"ent while yor in#estment in lar$e-"ompany sto"ks earne! an a#era$e of % per"ent. &hi"h one of the followin$ terms refers to the !ifferen"e between these two rates of retrn' A. risk premim (. $eometri" (. $eometri" retrn C. arithmeti" C. arithmeti" ). stan!ar! ). stan!ar! !e#iation *. #arian"e *. #arian"e +efer to se"tion 12.

AACSB: N/A Bloom's: Comprehension Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: is( premium

12-1


2. &hi"h one of the followin$ best !efines the #arian"e of an in#estments annal retrns o#er a nmber of years' A. The A. The a#era$e sare! !ifferen"e between the arithmeti" an! the $eometri" a#era$e annal retrns. (. The (. The sare! smmation of the !ifferen"es between the a"tal retrns an! the a#era$e $eometri" retrn. C. The C. The a#era$e !ifferen"e between the annal retrns an! the a#era$e retrn for the perio!. ). The ). The !ifferen"e between the arithmeti" a#era$e an! the $eometri" a#era$e retrn for the perio!. E. The a#era$e sare! !ifferen"e between the a"tal retrns an! the arithmeti" a#era$e retrn. +efer to se"tion 12./

AACSB: N/A Bloom's: Comprehension Comprehension Difficulty: )nterme*iate Learning Objectie: !"#! Section: !"$+ &opic: ,ariance

. Stan!ar! !e#iation is a measre of whi"h one of the followin$' A. a#era$e A. a#era$e rate of retrn B. #olatility C. probability C. probability ). risk ). risk premim *. real *. real retrns +efer to se"tion 12./

AACSB: N/A Bloom's: -no.le*ge -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$+ &opic: Stan*ar* *eiation

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/. &hi"h one of the followin$ is !efine! by its mean an! its stan!ar! !e#iation' A. arithmeti" A. arithmeti" nominal retrn (. $eometri" (. $eometri" real retrn C. normal !istribtion ). #arian"e ). #arian"e *. risk *. risk premim +efer to se"tion 12./

AACSB: N/A Bloom's: -no.le*ge -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$+ &opic: &opic: Normal *istribution

%. The a#era$e "ompon! retrn earne! per year o#er a mlti-year perio! is "alle! the 00000 a#era$e retrn. A. arithmeti" A. arithmeti" (. stan!ar! (. stan!ar! C. #ariant C. #ariant D. $eometri" *. real *. real +efer to se"tion 12.%

AACSB: N/A Bloom's: -no.le*ge -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: &opic: 0eometric aerage return

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. The retrn earne! in an a#era$e year o#er a mlti-year perio! is "alle! the 00000 a#era$e retrn. A. arithmeti" (. stan!ar! (. stan!ar! C. #ariant C. #ariant ). $eometri" ). $eometri" *. real *. real +efer to se"tion 12.%

AACSB: N/A Bloom's: -no.le*ge -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: &opic: Arithmetic aerage return

. Assme that the market pri"es of the se"rities that tra!e in a parti"lar market fairly refle"t the a#ailable information relate! to those se"rities. &hi"h one of the followin$ terms best !efines that market' A. riskless A. riskless market (. e#enly (. e#enly !istribte! market C. 3ero C. 3ero #olatility market ). (lmes ). (lmes market E. effi"ient "apital market +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge -no.le*ge Difficulty: Basic Learning Objectie: !"#+ Section: !"$1 &opic: &opic: 2fficient capital mar(et

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4. &hi"h one of the followin$ statements best !efines the effi"ient market hypothesis' A. *ffi"ient A. *ffi"ient markets limit "ompetition. (. Se"rity (. Se"rity pri"es in effi"ient markets remain stea!y as new information be"omes a# ailable. C. Mispri"e! C. Mispri"e! se"rities are "ommon in effi"ient markets. D. All se"rities in an effi"ient market are 3ero net present #ale in#estments. *. 5rofits *. 5rofits are remo#e! as a market in"enti#e when whe n markets be"ome effi"ient. +efer to se"tion 12.

AACSB: N/A Bloom's: Comprehension Comprehension Difficulty: Basic Learning Objectie: !"#+ Section: !"$1 &opic: &opic: 2fficient mar(ets

6. Sta"y pr"hase! a sto"k last year an! sol! it to!ay for 7 a share more than her pr"hase pri"e. She re"ei#e! a total of 78.% in !i#i!en!s. &hi"h one of the followin$ statements is "orre"t in relation to this in#estment' A. The A. The !i#i!en! yiel! is e9presse! as a per"enta$e of the sellin$ pri"e. (. The (. The "apital $ain wol! ha#e been less ha! Sta"y not re"ei#e! the !i#i!en!s. C. The C. The total !ollar retrn per share is 7. D. The "apital $ains yiel! is positi#e. *. The *. The !i#i!en! yiel! is $reater than the "apital $ains yiel!. +efer to se"tion 12.1

AACSB: N/A Bloom's: Comprehension Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: eturns

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18. &hi"h one of the followin$ "orre"tly !es"ribes the !i#i!en! yiel!' A. ne9t years annal !i#i!en! !i#i!e! by to!ays sto"k pri"e (. this years annal !i#i!en! !i#i!e! by to!ays sto"k pri"e C. this years annal !i#i!en! !i#i!e! by ne9t years e9pe"te! sto"k pri"e ). ne9t years annal !i#i!en! !i#i!e! by this years annal !i#i!en! *. the in"rease in ne9t years !i#i!en! o#er this years !i#i!en! !i#i!e! by this years !i#i!en! +efer to se"tion 12.1

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Dii*en* yiel*

11. (aysi!e Marina :st annon"e! it is !e"reasin$ its annal !i#i!en! from 71./ per share to 71.%8 per share effe"ti#e imme!iately. ;f the !i#i!en! yiel! remains at its preannon"ement le#el, then yo know the sto"k pri"e< A. was naffe"te! by the annon"ement. (. in"rease! proportionately with the !i#i!en! !e"rease. C. !e"rease! proportionately with the !i#i!en! !e"rease. ). !e"rease! by 78.1/ per share. *. in"rease! by 78.1/ per share. +efer to se"tion 12.1

AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objectie: !"#! Section: !"$! &opic: Dii*en* yiel*

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12. &hi"h one of the followin$ statements relate! to "apital $ains is "orre"t' A. The "apital $ains yiel! in"l!es only reali3e! "apital $ains. B. An in"rease in an nreali3e! "apital $ain will in"rease the "apital $ains yiel!. C. The "apital $ains yiel! mst be either positi#e or eal to 3ero. ). The "apital $ains yiel! is e9presse! as a per"enta$e of the sales pri"e. *. The "apital $ains yiel! represents the total retrn earne! by an in#estor. +efer to se"tion 12.1

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Capital gains y iel*

1. &hi"h of the followin$ statements is "orre"t in relation to a sto"k in#estment' ;. The "apital $ains yiel! "an be positi#e, ne$ati#e, or 3ero. ;;. The !i#i!en! yiel! "an be positi#e, ne$ati#e, or 3ero. ;;;. The total retrn "an be positi#e, ne$ati#e, or 3ero. ;=. >either the !i#i!en! yiel! nor the total retrn "an be ne$ati#e. A. ; only (. ; an! ;; only C. ; an! ;;; only ). ; an! ;= only *. ;= only +efer to se"tion 12.1

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Stoc( returns

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1/. The real rate of retrn on a sto"k is appro9imately eal to the nominal rate of retrn< A. mltiplie! by ?1 @ inflation rate. (. pls the inflation rate. C. mins the inflation rate. ). !i#i!e! by ?1 @ inflation rate. *. !i#i!e! by ?1- inflation rate. +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: eal return

1%. As lon$ as the inflation rate is positi#e, the real rate of retrn on a se"rity will be 0000 the nominal rate of retrn. A. $reater than (. eal to C. less than ). $reater than or eal to *. nrelate! to +efer to se"tion 12.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: eal return

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1. Small-"ompany sto"ks, as the term is se! in the te9tbook, are best !efine! as the< A. %88 newest "orporations in the B.S. (. firms whose sto"k tra!es TC. C. smallest twenty per"ent of the firms liste! on the >DS*. ). smallest twenty-fi#e per"ent of the firms liste! on >AS)AE. *. firms whose sto"k is liste! on >AS)AE. +efer to se"tion 12.2

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$" &opic: Small#company stoc(s

1. &hi"h one of the followin$ statements is a "orre"t refle"tion of the B.S. markets for the perio! 162-288' A. B.S. Treasry bill retrns ne#er e9"ee!e! a 6 per"ent retrn in any one year !rin$ the perio!. B. B.S. Treasry bills pro#i!e! a positi#e rate of retrn ea"h an! e#e ry year !rin$ the perio!. C. ;nflation eale! or e9"ee!e! the retrn on B.S. Treasry bills e#ery year !rin$ the perio!. ). Lon$-term $o#ernment bon!s otperforme! B.S. Treasry bills e#ery year !rin$ the perio!. *. >ational !eflation o""rre! at least on"e e#ery !e"a!e !rin$ the perio!. +efer to se"tion 12.2

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$" &opic: 3istorical recor*

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14. &hi"h one of the followin$ "ate$ories of se"rities ha! the hi$hest a#era$e retrn for the perio! 162-288' A. B.S. Treasry bills (. lar$e "ompany sto"ks C. small "ompany sto"ks ). lon$-term "orporate bon!s *. lon$-term $o#ernment bon!s +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$% &opic: 3istorical returns

16. &hi"h one of the followin$ "ate$ories of se"rities ha! the lowest a#era$e risk premim for the perio! 162-288' A. lon$-term $o#ernment bon!s (. small "ompany sto"ks C. lar$e "ompany sto"ks ). lon$-term "orporate bon!s E. B.S. Treasry bills +efer to se"tion 12.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#% Section: !"$% &opic: is( premium

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28. &hi"h one of the followin$ "ate$ories of se"rities has ha! the most #olatile retrns o#er the perio! 162-288' A. lon$-term "orporate bon!s (. lar$e-"ompany sto"ks C. interme!iate-term $o#ernment bon!s ). B.S. Treasry bills E. small-"ompany sto"ks +efer to se"tion 12./

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#% Section: !"$+ &opic: 3istorical ris(ss

21. &hi"h one of the followin$ statements "orre"tly applies to the perio! 162-288' A. Lar$e-"ompany sto"ks earne! a hi$her a#era$e risk premim than !i! small-"ompany sto"ks. (. ;nterme!iate-term $o#ernment bon!s ha! a hi$her a#era$e retrn than lon$-term "orporate bon!s. C. Lar$e-"ompany sto"ks ha! an a#era$e annal retrn of 1/. per"ent. ). ;nflation a#era$e! 2. per"ent for the perio!. E. B.S. Treasry bills ha! a positi#e a#era$e real rate of retrn. +efer to se"tion 12.


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22. &hi"h one of the followin$ time perio!s is asso"iate! with hi$h rates of inflation' A. 1626-16 (. 16%-161 C. 164-1641 ). 1662-166 *. 2881-288% +efer to se"tion 12.2

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$" &opic: )nflation

2. &hi"h one of the followin$ statements "on"ernin$ B.S. Treasry bills is "orre"t for the perio! 162- 288' A. The annal rate of retrn always e9"ee!e! the annal inflation rate. (. The a#era$e risk premim was 8. per"ent. C. The annal rate of retrn was always positi#e. ). The a#era$e e9"ess retrn was 1.1 per"ent. *. The a#era$e real rate of retrn was 3ero. +efer to se"tions 12.2 an! 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$" an* !"$% &opic: 3istorical returns

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2/. &hi"h one of the followin$ is a "orre"t rankin$ of se"rities base! on their #olatility o#er the perio! of 162-288' +ank from hi$hest to lowest. A. lar$e "ompany sto"ks, B.S. Treasry bills, lon$-term $o#ernment bon!s (. small "ompany sto"ks, lon$-term "orporate bon!s, lar$e "ompany sto"ks C. small "ompany sto"ks, lon$-term "orporate bon!s, interme!iate-term $o#ernment bon!s ). lar$e "ompany sto"ks, small "ompany sto"ks, lon$-term $o#ernment bon!s *. interme!iate-term $o#ernment bon!s, lon$-term "orporate bon!s, B.S. Treasry bills +efer to se"tion 12./

AACSB: N/A Bloom's: -no.le*ge Difficulty: )nterme*iate Learning Objectie: !"#% Section: !"$+ &opic: 3istorical ris(ss

2%. &hat was the hi$hest annal rate of inflation !rin$ the perio! 162-288' A. between 8 an!  per"ent (. between  an! % per"ent C. between % an! 18 per"ent D. between 18 an! 1% per"ent *. between 1% an! 28 per"ent +efer to se"tion 12.2

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$" &opic: )nflation

12-1


2. The e9"ess retrn is "ompte! as the< A. retrn on a se"rity mins the inflation rate. B. retrn on a risky se"rity mins the risk-free rate. C. risk premim on a risky se"rity mins the risk-free rate. ). the risk-free rate pls the inflation rate. *. risk-free rate mins the inflation rate. +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: 24cess return

2. &hi"h one of the followin$ earne! the hi$hest risk premim o#er the perio! 162-288' A. lon$-term "orporate bon!s (. B.S. Treasry bills C. small-"ompany sto"ks ). lar$e-"ompany sto"ks *. lon$-term $o#ernment bon!s +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#% Section: !"$% &opic: is( premium

12-1/


24. &hat was the a#era$e rate of inflation o#er the perio! of 162-288' A. less than 2.8 per"ent (. between 2.8 an! 2.% per"ent C. between 2.% an! .8 per"ent D. between .8 an! .% per"ent *. $reater than .% per"ent +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$% &opic: )nflation

26. Assme that yo in#est in a portfolio of lar$e-"ompany sto"ks. Frther assme that the portfolio will earn a rate of retrn similar to the a#era$e retrn on lar$e-"ompany sto"ks for the perio! 162-288. &hat rate of retrn shol! yo e9pe"t to earn' A. less than 18 per"ent B. between 18 an! 12.% per"ent C. between 12.% an! 1% per"ent ). between 1% an! 1.% per"ent *. more than 1.% per"ent +efer to se"tion 12.


12-1%


8. The a#era$e annal retrn on small-"ompany sto"ks was abot 00000 per"ent $reater than the a#era$e annal retrn on lar$e-"ompany sto"ks o#er the perio! 162-288. A.  B. % C.  ). 6 *. 11 +efer to se"tion 12.


1. &hi"h one of the followin$ was the least #olatile o#er the perio! of 162-288' A. lar$e-"ompany sto"ks (. inflation C. lon$-term "orporate bon!s D. B.S. Treasry bills *. interme!iate-term $o#ernment bon!s +efer to se"tion 12./

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#% Section: !"$+ &opic: 3istorical ris(s

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2. &hi"h one of the followin$ statements is "orre"t' A. The $reater the #olatility of retrns, the $reater the risk premim. (. The lower the #olatility of retrns, the $reater the risk premim. C. The lower the a#era$e retrn, the $reater the risk premim. ). The risk premim is nrelate! to the a#era$e rate of retrn. *. The risk premim is not affe"te! by the #olatility of retrns. +efer to se"tions 12. an! 12./

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#% Section: !"$% an* !"$+ &opic: is( premium

. &hi"h of the followin$ "orrespon! to a wi!e freen"y !istribtion' ;. relati#ely low risk ;;. relati#ely low rate of retrn ;;;. relati#ely hi$h stan!ar! !e#iation ;=. relati#ely lar$e risk premim A. ;; only (. ;;; only C. ; an! ;; only ). ;; an! ;;; only E. ;;; an! ;= only +efer to se"tion 12./

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#% Section: !"$+ &opic: 5 re6uency *istribution

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/. To "on#in"e in#estors to a""ept $reater #olatility, yo mst< A. !e"rease the risk premim. B. in"rease the risk premim. C. !e"rease the real retrn. ). !e"rease the risk-free rate. *. in"rease the risk-free rate. +efer to se"tion 12./

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#% Section: !"$+ &opic: is( premium

%. ;f the #ariability of the retrns on lar$e-"ompany sto"ks were to in"rease o#er the lon$term, yo wol! e9pe"t whi"h of the followin$ to o""r as a reslt' ;. !e"rease in the a#era$e rate of retrn ;;. in"rease in the risk premim ;;;. in"rease in the 4 per"ent probability ran$e of the freen"y !istribtion of retrns ;=. !e"rease in the stan!ar! !e#iation A. ; only (. ;= only C. ;; an! ;;; only ). ; an! ;;; only *. ;; an! ;= only +efer to se"tion 12./

AACSB: N/A Bloom's: Analysis Difficulty: )nterme*iate Learning Objectie: !"#% Section: !"$+ &opic: ,ariability of returns

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. &hi"h one of the followin$ statements is "orre"t base! on the histori"al re"or! for the perio! 162-288' A. The stan!ar! !e#iation of retrns for small-"ompany sto"ks was !oble that of lar$e"ompany sto"ks. (. B.S. Treasry bills ha! a 3ero stan!ar! !e#iation of retrns be"ase they are "onsi!ere! to be risk-free. C. Lon$-term $o#ernment bon!s ha! a lower retrn bt a hi$her stan!ar! !e#iation on a#era$e than !i! lon$-term "orporate bon!s. ). ;nflation was less #olatile than the retrns on B.S. Treasry bills. *. Lon$-term $o#ernment bon!s n!erperforme! interme!iate-term $o#ernment bon!s. +efer to se"tion 12./

AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objectie: !"#% Section: !"$+ &opic: 3istorical returns an* ris(s

. &hat is the probability that small-"ompany sto"ks will pro!"e an annal retrn that is more than one stan!ar! !e#iation below the a#era$e' A. 1.8 per"ent (. 2.% per"ent C. %.8 per"ent D. 1 per"ent *. 2 per"ent +efer to se"tion 12./

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#% Section: !"$+ &opic: 7 robability *istribution

12-16


4. A""or!in$ to Geremy Sie$el, the real retrn on sto"ks o#er the lon$-term has a#era$e! abot< A. .4 per"ent (. 4. per"ent C. 18./ per"ent ). 12. per"ent *. 1/.4 per"ent +efer to se"tion 12.%

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#" Section: !"$ &opic: 3istorical returns

6. The histori"al re"or! for the perio! 162-288 spports whi"h one of the followin$ statements' A. A hi$her-risk se"rity will pro#i!e a hi$her rate of retrn ne9t year than will a lower-risk se"rity. (. ;f yo nee! a state! amont of money ne9t year, yor best in#estment option to!ay for those fn!s wol! be lon$-term $o#ernment bon!s. C. ;n"rease! lon$-rn potential retrns are obtaine! by lowerin$ risks. D. ;t is possible for small-"ompany sto"ks to more than !oble in #ale in any one $i#en year. *. ;nflation was positi#e ea"h year thro$hot the perio! of 162-288. +efer to se"tions 12.2 an! 12./

AACSB: N/A Bloom's: -no.le*ge Difficulty: )nterme*iate Learning Objectie: !"#" Section: !"$" an* !"$+ &opic: 3istorical returns

12-28


/8. &hi"h of the followin$ statements are tre base! on the histori"al re"or! for 162-288' ;. +isk an! potential rewar! are in#ersely relate!. ;;. +isk-free se"rities pro!"e a positi#e real rate of retrn ea"h year. ;;;. +etrns are more pre!i"table o#er the short-term than they are o#er the lon$-term. ;=. (on!s are $enerally a safer in#estment than are sto"ks. A. ; only B. ;= only C. ;; an! ;;; only ). ;; an! ;= only *. ;;, ;;;, an! ;= only +efer to se"tions 12. an! 12./

AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objectie: !"#" Section: !"$% an* !"$+ &opic: 3istorical returns an* ris(s

/1. *stimates of the rate of retrn on a se"rity base! on a histori"al arithmeti" a#era$e will probably ten! to 00000 the e9pe"te! retrn for the lon$-term while estimates sin$ the histori"al $eometri" a#era$e will probably ten! to 00000 the e9pe"te! retrn for the shortterm. A. o#erestimate o#erestimate B. o#erestimate n!erestimate C. n!erestimate o#erestimate ). n!erestimate n!erestimate *. a""rately a""rately +efer to se"tion 12.%

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: Blume's formula

12-21


/2. The primary prpose of (lmes formla is to< A. "ompte an a""rate histori"al rate of retrn. (. !etermine a sto"ks tre "rrent #ale. C. "onsi!er "ompon!in$ when estimatin$ a rate of retrn. ). !etermine the a"tal real rate of retrn. E. pro:e"t ftre rates of retrn. +efer to se"tion 12.%

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: Blume's formula

/. &hi"h two of the followin$ are the most likely reasons why a sto"k pri"e mi$ht not rea"t at all on the !ay that new information relate! to the sto"k isser is release!' ;. insi!ers knew the information prior to the annon"ement ;;. in#estors nee! time to !i$est the information prior to rea"tin$ ;;;. the information has no bearin$ on the #ale of the firm ;=. the information was anti"ipate! A. ; an! ;; only (. ; an! ;;; only C. ;; an! ;;; only ). ;; an! ;= only E. ;;; an! ;= only +efer to se"tion 12.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#+ Section: !"$1 &opic: 8ar(et e fficiency

12-22


//. &hi"h one of the followin$ is most in!i"ati#e of a totally effi"ient sto"k market' A. e9traor!inary retrns earne! on a rotine basis (. positi#e net present #ales on sto"k in#estments o#er the lon$-term C. 3ero net present #ales for all sto"k in#estments ). arbitra$e opportnities whi"h !e#elop on a rotine basis *. reali3in$ ne$ati#e retrns on a rotine basis +efer to se"tion 12.


/%. &hi"h one of the followin$ statements is "orre"t "on"ernin$ market effi"ien"y' A. +eal asset markets are more effi"ient than finan"ial markets. (. ;f a market is effi"ient, arbitra$e opportnities shol! be "ommon. C. ;n an effi"ient market, some market parti"ipants will ha#e an a!#anta$e o#er others. D. A firm will $enerally re"ei#e a fair pri"e when it isses new shares of sto"k. *. >ew information will $ra!ally be refle"te! in a sto"ks pri"e to a#oi! any s!!en "han$e in the pri"e of the sto"k. +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#+ Section: !"$1 &opic: 8ar(et e fficiency

12-2


/. *ffi"ient finan"ial markets fl"tate "ontinosly be"ase< A. the markets are "ontinally rea"tin$ to ol! information as that information is absorbe!. B. the markets are "ontinally rea"tin$ to new information. C. arbitra$e tra!in$ is limite!. ). "rrent tra!in$ systems reire hman inter#ention. *. in#estments pro!"e #aryin$ le#els of net present #ales. +efer to se"tion 12.


/. ;nsi!e information has the least #ale when finan"ial markets are< A. weak form effi"ient. (. semiweak form effi"ient. C. semistron$ form effi"ient. D. stron$ form effi"ient. *. ineffi"ient. +efer to se"tion 12.

AACSB: N/A Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#+ Section: !"$1 &opic: 8ar(et e fficiency

12-2/


/4. A""or!in$ to theory, st!yin$ histori"al sto"k pri"e mo#ements to i!entify mispri"e! sto"ks< A. is effe"ti#e as lon$ as the market is only semistron$ form effi"ient. (. is effe"ti#e pro#i!e! the market is only weak form effi"ient. C. is ineffe"ti#e e#en when the market is only weak form effi"ient. ). be"omes ineffe"ti#e as soon as the market $ains semistron$ form effi"ien"y. *. is ineffe"ti#e only in stron$ form effi"ient markets. +efer to se"tion 12.


/6. &hi"h of the followin$ statements relate! to market effi"ien"y ten! to be spporte! by "rrent e#i!en"e' ;. Markets ten! to respon! i"kly to new information. ;;. ;t is !iffi"lt for in#estors to earn abnormal retrns. ;;;. Short-rn pri"es are !iffi"lt to pre!i"t a""rately base! on pbli" information. ;=. Markets are most likely weak form effi"ient. A. ; an! ;;; only (. ;; an! ;= only C. ; an! ;= only ). ;, ;;;, an! ;= only E. ;, ;;, an! ;;; only +efer to se"tion 12.

AACSB: N/A Bloom's: Comprehension Difficulty: )nterme*iate Learning Objectie: !"#+ Section: !"$1 &opic: 8ar(et e fficiency

12-2%


%8. ;f yo e9"el in analy3in$ the ftre otlook of firms, yo wol! prefer the finan"ial markets be 0000 form effi"ient so that yo "an ha#e an a!#anta$e in the marketpla"e. A. weak (. semiweak C. semistron$ ). stron$ *. perfe"t +efer to se"tion 12.


%1. Do are aware that yor nei$hbor tra!es sto"ks base! on "onfi!ential information he o#erhears at his workpla"e. This information is not a#ailable to the $eneral pbli". This nei$hbor "ontinally bra$s to yo abot the profits he earns on these tra!es. Ii#en this, yo wol! ten! to ar$e that the finan"ial markets are at best 00000 form effi"ient. A. weak (. semiweak C. semistron$ ). stron$ *. perfe"t +efer to se"tion 12.


12-2


%2. The B.S. Se"rities an! *9"han$e Commission perio!i"ally "har$es in!i#i!als with insi!er tra!in$ an! "laims those in!i#i!als ha#e ma!e nfair profits. Ii#en this, yo wol! be most apt to ar$e that the markets are less than 00000 form effi"ient. A. weak (. semiweak C. semistron$ D. stron$ *. perfe"t +efer to se"tion 12.


%. ;n!i#i!als who "ontinally monitor the finan"ial markets seekin$ mispri"e! se"rities< A. earn e9"ess profits o#er the lon$-term. B. make the markets in"reasin$ly more effi"ient. C. are ne#er able to fin! a se"rity that is temporarily mispri"e!. ). are o#erwhelmin$ly s""essfl in earnin$ abnormal profits. *. are always ite s""essfl sin$ only histori"al pri"e information as their basis of e#alation. +efer to se"tion 12.


12-2


%/. ne year a$o, yo pr"hase! a sto"k at a pri"e of 72.1. The sto"k pays arterly !i#i!en!s of 78.28 per share. To!ay, the sto"k is sellin$ for 724.28 per share. &hat is yor "apital $ain on this in#estment' A. -7/.1 B. -7.6 C. -7. ). -7.1 *. -72.6 Capital $ain J 724.28 - 72.1 J -7.6

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Capital gain

%%. Si9 months a$o, yo pr"hase! 188 shares of sto"k in Ilobal Tra!in$ at a pri"e of 74.8 a share. The sto"k pays a arterly !i#i!en! of 78.1% a share. To!ay, yo sol! all of yor shares for 7/8.18 per share. &hat is the total amont of yor !i#i!en! in"ome on this in#estment' A. 71% B. 78 C. 7/% ). 7%8 *. 78 )i#i!en! in"ome J ?78.1% × 2 × 188 J 78

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Dii*en* income

12-24


%. A year a$o, yo pr"hase! /88 shares of Stellar &oo! 5ro!"ts, ;n". sto"k at a pri"e of 74.2 per share. The sto"k pays an annal !i#i!en! of 78.18 per share. To!ay, yo sol! all of yor shares for 7/.48 per share. &hat is yor total !ollar retrn on this in#estment' A. -742 (. -72 C. -71,%24 D. -71,/44 *. -71,8 Total !ollar retrn J ?7/.48 - 74.2 @ 78.18 × /88 J -71,/44

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: &otal *ollar return

%. Do own /88 shares of &estern Fee! Mills sto"k #ale! at 7%1.28 per share. &hat is the !i#i!en! yiel! if yor annal !i#i!en! in"ome is 7%2' A. 1.4 per"ent B. 1.2 per"ent C. 1.4 per"ent ). 1.1 per"ent *. 1.21 per"ent )i#i!en! yiel! J ?7%2/887%1.28 J 1.2 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Dii*en* yiel*

12-26


%4. &est &in! Tors sto"k is "rrently sellin$ for 7/4 a share. The sto"k has a !i#i!en! yiel! of 2. per"ent. How m"h !i#i!en! in"ome will yo re"ei#e per year if yo pr"hase 288 shares of this sto"k' A. 72/.6 (. 7.28 C. 712/.48 ). 72.88 E. 72/6.8 )i#i!en! in"ome J 7/4 × 8.82 × 288 J 72/6.8


%6. ne year a$o, yo pr"hase! a sto"k at a pri"e of 7/.%8 a share. To!ay, yo sol! the sto"k an! reali3e! a total loss of 22.11 per"ent. Dor "apital $ain was -712.8 a share. &hat was yor !i#i!en! yiel!' A. /. per"ent (. /.44 per"ent C. %.82 per"ent ). 12. per"ent *. 1/.4 per"ent )i#i!en! yiel! J -8.2211 - ?-12.87/.%8 J /. per"ent


12-8


8. Do :st sol! 88 shares of &esley, ;n". sto"k at a pri"e of 71.86 a share. Last year, yo pai! 78.62 a share to by this sto"k. #er the "orse of the year, yo re"ei#e! !i#i!en!s totalin$ 71.28 per share. &hat is yor total "apital $ain on this in#estment' A. -714 (. -7182 C. 7182 ). 714 *. 728 Capital $ain J ?71.86 - 78.62 × 88 J 7182

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Capital gain

1. Last year, yo pr"hase! %88 shares of Analo$ )e#i"es, ;n". sto"k for 711.1 a share. Do ha#e re"ei#e! a total of 7128 in !i#i!en!s an! 7,168 from sellin$ the shares. &hat is yor "apital $ains yiel! on this sto"k' A. 2.8 per"ent (. 2. per"ent C. 24.4% per"ent ). 26.1 per"ent *. 1.82 per"ent Capital $ains yiel! J ?7,168%88 - 711.1711.1 J 24.4% per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Capital gains y iel*

12-1


2. To!ay, yo sol! 288 shares of ;n!ian +i#er 5ro!"e sto"k. Dor total retrn on these shares is %.% per"ent. Do pr"hase! the shares one year a$o at a pri"e of 71.18 a share. Do ha#e re"ei#e! a total of 7188 in !i#i!en!s o#er the "orse of the year. &hat is yor "apital $ains yiel! on this in#estment' A. .4 per"ent B. /.8/ per"ent C. %. per"ent ). .2 per"ent *. ./1 per"ent Capital $ains yiel! J .8%% - ?7188728871.18 J /.8/ per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Capital gains y iel*

. For months a$o, yo pr"hase! 1,%88 shares of Lakesi!e (ank sto"k for 711.28 a share. Do ha#e re"ei#e! !i#i!en! payments eal to 78.2% a share. To!ay, yo sol! all of yor shares for 74.8 a share. &hat is yor total !ollar retrn on this in#estment' A. -7,688 B. -7,%2% C. -7,1%8 ). -72,6%8 *. -72,4% Total !ollar retrn J ?74.8 - 711.28 @ 78.2% × 1,%88 J -7,%2%

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: Dollar returns

12-2


/. ne year a$o, yo pr"hase! %88 shares of (est &in$s, ;n". sto"k at a pri"e of 76.8 a share. The "ompany pays an annal !i#i!en! of 78.18 per share. To!ay, yo sol! all of yor shares for 71%.8 a share. &hat is yor total per"enta$e retrn on this in#estment' A. 4./ per"ent (. 6.18 per"ent C. 6.2 per"ent ). 2.%8 per"ent E. .%/ per"ent Total per"enta$e retrn J ?71%.8 - 76.8 @ 78.1876.8 J .%/ per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$! &opic: 7ercentage return

%. Last year, yo pr"hase! a sto"k at a pri"e of 7/.18 a share. #er the "orse of the year, yo re"ei#e! 72./8 per share in !i#i!en!s while inflation a#era$e! ./ per"ent. To!ay, yo sol! yor shares for 7/6.%8 a share. &hat is yor appro9imate real rate of retrn on this in#estment' A. .8 per"ent B. .6 per"ent C. .14 per"ent ). 6.6 per"ent *. 18.16 per"ent >ominal retrn J ?7/6.%8 - 7/.18 @ 72./87/.18 J 18.16 per"ent Appro9imate real retrn J 8.1816 - 8.8/ J .6 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: Appro4imate real return

12-


. ne year a$o, yo pr"hase! 288 shares of a sto"k at a pri"e of 7%/.14 a share. To!ay, yo sol! those shares for 7/8.2% a share. )rin$ the past year, yo re"ei#e! total !i#i!en!s of 71/ while inflation a#era$e! /.2 per"ent. &hat is yor appro9imate real rate of retrn on this in#estment' A. -2/.28 per"ent B. -24./8 per"ent C. -28.88 per"ent ). 28.88 per"ent *. 2/.28 per"ent >ominal retrn J 7/8.2% - 7%/.14 @ ?71/2887%/.14 J -8.2/28 Appro9imate real retrn J -8.2/28 - 8.8/2 J -24./8 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: Appro4imate real return

. &hat is the amont of the e9"ess retrn on a B.S. Treasry bill if the risk-free rate is 2.4 per"ent an! the market rate of retrn is 4.% per"ent' A. 8.88 per"ent (. 2.48 per"ent C. %.%% per"ent ). 4.% per"ent *. 11.1% per"ent There is no e9"ess retrn, or risk premim, for a risk-free se"rity s"h as the T-bill.

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$% &opic: is(#free security

12-/


4. A sto"k ha! retrns of 11 per"ent, -14 per"ent, -21 per"ent, % per"ent, an! / per"ent o#er the past fi#e years. &hat is the stan!ar! !e#iation of these retrns' A. 14./ per"ent (. 28.21 per"ent C. 28.4 per"ent D. 22.8 per"ent *. 2./6 per"ent A#era$e retrn J ?8.11 - 8.14 - 8.21 @ 8.8% @ 8./% J .822 σ J√ 1?% - 1 ?8.11 - 8.8222 @ ?-8.14 - 8.8222 @ ?-8.21 -8.8222 @ ?8.8% - 8.8222 @ ?8./ 8.8222 J 22.8 per"ent

AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate Learning Objectie: !"#! Section: !"$+ &opic: Stan*ar* *eiation

6. The "ommon sto"k of Air Bnite!, ;n"., ha! annal retrns of 1%. per"ent, 2./ per"ent, -11.4 per"ent, an! 2.6 per"ent o#er the last for years, respe"ti#ely. &hat is the stan!ar! !e#iation of these retrns' A. 1.26 per"ent (. 1/.1/ per"ent C. 1.%8 per"ent ). 1.4 per"ent E. 16.8% per"ent A#era$e retrn J ?8.1% @ 8.82/ - 8.114 @ 8.26/ J -.86% σ J√1?/ - 1 ?8.1% - 8.86%2 @ ?8.82/ - 8.86%2 @ ?-8.114 - 8.86%2 @ ?8.26 8.86%2 J 16.8% per"ent

AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate Learning Objectie: !"#! Section: !"$+ &opic: Stan*ar* *eiation

12-%


8. A sto"k ha! annal retrns of . per"ent, -4. per"ent, %. per"ent, an! 11.1 per"ent o#er the past for years. &hi"h one of the followin$ best !es"ribes the probability that this sto"k will pro!"e a retrn of 28 per"ent or more in a sin$le year' A. less than 8.1 per"ent (. less than 8.% per"ent bt $reater than 8.1 per"ent C. less than 1.8 per"ent bt $reater the 8.% per"ent D. less than 2.% per"ent bt $reater than 1.8 per"ent *. less than % per"ent bt $reater than 2.% per"ent A#era$e retrn J ?8.8 - 8.84 @ 8.8% @ 8.111/ J 8.8268 Σ J √ 1?/ - 1 ?8.8 - 8.826 2 @ ?-8.84 - 8.8262 @ ?8.8% - 8.8262 @ ?8.111 - 8.8262 J 8.84 Bpper en! of 6% per"ent ran$e J 8.8268 @ ?2 × 8.84 J 16.2 per"ent Bpper en! of 66 per"ent ran$e J 8.8268 @ ? × 8.84 J 2.64 per"ent A retrn of 28 per"ent or more in a sin$le year has between a 1 per"ent an! a 2.% per"ent probability of o""rrin$ in any one year.

AACSB: Analytic Bloom's: Analysis Difficulty: )nterme*iate Learning Objectie: !"#% Section: !"$+ &opic: 7robability of occurrence

1. A sto"k has an e9pe"te! rate of retrn of 1 per"ent an! a stan!ar! !e#iation of 21 per"ent. &hi"h one of the followin$ best !es"ribes the probability that this sto"k will lose at least half of its #ale in any one $i#en year' A. 8.1 per"ent B. 8.% per"ent C. 1.8 per"ent ). 2.% per"ent *. %.8 per"ent Lower bon! of 66 per"ent ran$e J 8.1 - ? × 8.21 J -%8 per"ent 5robability of losin$ %8 per"ent or more in any one year is 8.% per"ent.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objectie: !"#% Section: !"$+ &opic: 7robability of occurrence

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2. A sto"k has retrns of 14 per"ent, 11 per"ent, -21 per"ent, an!  per"ent for the past for years. (ase! on this information, what is the 6% per"ent probability ran$e of retrns for any one $i#en year' A. -1.% to 28.% per"ent (. -2/.8 to 1.48 per"ent C. -8.2 to .2 per"ent ). -/.4 to %/.4 per"ent *. -1. to 1. per"ent A#era$e retrn J ?8.14 @ 8.11 - 8.21 @ 8.8/ J 8.8% σ J ?8.14 - 8.8%2 @ ?8.11 - 8.8%2 @ ?-8.21 - 8.8%2 @ ?8.8 - 8.8%2 J .18%4 6%N probability ran$e J 8.8% ± ?2 × 8.18%4 per"ent J -8.2 to .2 per"ent


. Dor frien! is the owner of a sto"k whi"h ha! retrns of 2% per"ent, - per"ent, 1 per"ent, an! 1 per"ent for the past three years. Dor frien! thinks the sto"k may be able to a"hie#e a retrn of %8 per"ent or more in a sin$le year. (ase! on these retrns, what is the probability that yor frien! is "orre"t' A. less than 8.% per"ent (. $reater than 8.% per"ent bt less than 1.8 per"ent C. $reater than 1.8 per"ent bt less than 2.% per"ent D. $reater than 2.% per"ent bt less than 1 per"ent *. $reater than 1.8 per"ent A#era$e retrn J ?8.2% - 8. @ 8.81 @ 8.1/ J 8.81% σ J √ 1?/ - 1 ?8.2% - 8.81% 2 @ ?-8. - 8.81%2 @ ?8.81 - 8.81%2 @ ?8.1 - 8.81%2 J 8.246 Bpper en! of 4 per"ent ran$e J 8.81% @ ?1 × 8.246 J 24.6 per"ent Bpper en! of 6% per"ent ran$e J 8.81% @ ?2 × 8.246 J %%.24 per"ent The probability of earnin$ at least %8 per"ent in any one year is $reater than 2.% per"ent bt less than 1 per"ent.


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/. A sto"k ha! retrns of 1% per"ent, 4 per"ent, 12 per"ent, -21 per"ent, an! -/ per"ent for the past fi#e years. (ase! on these retrns, what is the appro9imate probability that this sto"k will retrn at least 1% per"ent in any one $i#en year' A. less than 8.% per"ent (. $reater than 8.% per"ent bt less than 1.8 per"ent C. $reater than 1.8 per"ent bt less than 2.% per"ent ). $reater than 2.% per"ent bt less than 1 per"ent E. $reater than 1.8 per"ent A#era$e retrn J ?8.1% @ 8.84 @ 8.12 - 8.21 - 8.8/% J 8.82 σ J √1?% - 1 ?8.1% - 8.822 @ ?8.84 - 8.822 @ ?8.12 - 8.822 @ ?-8.21 - 8.822 @ ?-8.8/ 8.822 J 8.1/% Bpper en! of 4 per"ent ran$e J 8.82 @ 8.1/% J 1.% per"ent 5robability of earnin$ at least 1% per"ent in any one year is $reater than 1 per"ent.


%. A sto"k ha! retrns of 1/ per"ent, 1 per"ent, -18 per"ent, an!  per"ent for the past for years. &hi"h one of the followin$ best !es"ribes the probability that this sto"k will lose no more than 18 per"ent in any one year' A. $reater than 8.% bt less than 1.8 per"ent (. $reater than 1.8 per"ent bt less than 2.% per"ent C. $reater than 2.% per"ent bt less than 1 per"ent D. $reater than 4/ per"ent bt less than 6.% per"ent *. $reater than 6% per"ent A#era$e retrn J ?8.1/ @ 8.1 - 8.18 @ 8.8/ J 8.8 σ J √1?/ - 1?8.1/ - 8.82 @ ?8.1 - 8.82 @ ?-8.18 - 8.82 @ ?8.8 - 8.82 J 8.1118 Lower bon! of 4 per"ent ran$e J 8.8 - ?1 × 8.1118 J -%.11 per"ent Lower bon! of 6% per"ent ran$e J 8.8 - ?2 × 8.1118 J -1.21 per"ent 5robability of losin$ more than 18 per"ent in any $i#en year is between 2.% an! 1 per"ent. Ths, the probability of >T losin$ more than 18 per"ent is between 4/ an! 6.% per"ent.


12-4


. #er the past fi#e years, a sto"k pro!"e! retrns of 11 per"ent, 1/ per"ent, 2 per"ent, -6 per"ent, an! % per"ent. &hat is the probability that an in#estor in this sto"k will not lose more than 18 per"ent in any one $i#en year' A. $reater than 8.% bt less than 1.8 per"ent (. $reater than 1.8 per"ent bt less than 2.% per"ent C. $reater than 2.% per"ent bt less than 1 per"ent D. $reater than 4/ per"ent bt less than 6.% per"ent *. $reater than 6% per"ent A#era$e retrn J ?8.11 @ 8.1/ @ 8.82 - 8.86 @ 8.8%% J 8.8/ σ J √1?% - 1?8.11 - 8.8/2 @ ?8.1/ - 8.8/2 @ ?8.82 - 8.8/2 @ ?-8.86 - 8.8/2 @ ?8.8% 8.8/2 J 8.8461 Lower bon! of 4N probability ran$e J 8.8/ - ?1 × 8.8461 J -/. per"ent Lower bon! of 6%N probability ran$e J 8.8/ - ?2 × 8.8461 J -1.2 per"ent The probability of losin$ 18 per"ent or more is $reater than 2.% per"ent bt less than 1 per"ent. Ths, the probability of >T losin$ more than 18 per"ent is $reater than 4/ per"ent bt less than 6.% per"ent.


. A sto"k has annal retrns of  per"ent, 1/ per"ent, - per"ent, an! 2 per"ent for the past for years. The arithmeti" a#era$e of these retrns is 00000 per"ent while the $eometri" a#era$e retrn for the perio! is 00000 per"ent. A. /.% /.% B. /.% /.% C. . .16 ). .16 . *. . . Arithmeti" a#era$e J ?8.8 @ 8.1/ - 8.8 @ 8.82/ J /.% per"ent Ieometri" retrn J ?1.8 × 1.1/ × 8.6 × 1.82.2% - 1 J /.% per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: Arithmetic an* geometric returns

12-6


4. A sto"k has annal retrns of 1 per"ent, 21 per"ent, -12 per"ent,  per"ent, an! - per"ent for the past fi#e years. The arithmeti" a#era$e of these retrns is 00000 per"ent while the $eometri" a#era$e retrn for the perio! is 00000 per"ent. A. .46 .2 (. .46 /.8 C. .2 .46 ). /.8 .2 E. /.8 .46 Arithmeti" a#era$e J ?8.1 @ 8.21- 8.12 @ 8.8 - 8.8% J /.8 per"ent Ieometri" retrn J ?1.1 × 1.21 × 8.44 × 1.8 × 8.6/.28 - 1 J .46 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: Arithmetic an* geometric returns

6. A sto"k ha! retrns of 1 per"ent, / per"ent, 4 per"ent, 1/ per"ent, -6 per"ent, an! -% per"ent o#er the past si9 years. &hat is the $eometri" a#era$e retrn for this time perio!' A. /.2 per"ent (. /. per"ent C. %.1 per"ent ). %.6 per"ent *. %.8 per"ent Ieometri" a#era$e J ?1.1 × 1.8/ × 1.84 × 1.1/ × 8.61 × 8.6%1 - 1 J /.2 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: 0eometric return

12-/8


48. A sto"k ha! the followin$ pri"es an! !i#i!en!s. &hat is the $eometri" a#era$e retrn on this sto"k'

A. -1%.4 per"ent B. -1%.21 per"ent C. -1. per"ent ). -12.61 per"ent *. -11./4 per"ent +etrn for year 2 J ?71.2 - 71./8 @ 78.%871./8 J /.682 per"ent +etrn for year  J ?71%./4 - 71.2 @ 78.%871.2 J -.4%84 per"ent +etrn for year / J ?76.1% - 71%./4 @ 78.2%71%./4 J -6.2% per"ent Ieometri" retrn J ?1.8/682 × 8.61/62 × 8.82%1 - 1 J -1%.21 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$ &opic: 0eometric return

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41. #er the past fifteen years, the "ommon sto"k of The Flower Shoppe, ;n". has pro!"e! an arithmeti" a#era$e retrn of 12.2 per"ent an! a $eometri" a#era$e retrn of 11.% per"ent. &hat is the pro:e"te! retrn on this sto"k for the ne9t fi#e years a""or!in$ to (lmes formla' A. 11.8 per"ent (. 11.46 per"ent C. 12.88 per"ent ). 12.8 per"ent *. 12.12 per"ent

AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate Learning Objectie: !"#! Section: !"$ &opic: Blume's formula

42. (ase! on past 2 years, &esterfiel! ;n!strial Spplys "ommon sto"k has yiel!e! an arithmeti" a#era$e rate of retrn of 6. per"ent. The $eometri" a#era$e retrn for the same perio! was 4.% per"ent. &hat is the estimate! retrn on this sto"k for the ne9t / years a""or!in$ to (lmes formla' A. 4.8 per"ent (. 4.62 per"ent C. 6.1 per"ent ). 6.4 per"ent E. 6.%8 per"ent


12-/2


4. A sto"k has a $eometri" a#era$e retrn of 1/. per"ent an! an arithmeti" a#era$e retrn of 1%.% per"ent base! on the last  years. &hat is the estimate! a#era$e rate of retrn for the ne9t  years base! on (lmes formla' A. 1/.6 per"ent (. 1/.6 per"ent C. 1%.24 per"ent D. 1%. per"ent *. 1%./2 per"ent


Essay Questions

4/. )efine an! e9plain the three forms of market effi"ien"y. The "rrent sto"k pri"e refle"ts the followin$ information for ea"h form of effi"ien"y<

Fee!ba"k< +efer to se"tion 12.

AACSB: eflectie thin(ing Bloom's: -no.le*ge Difficulty: Basic Learning Objectie: !"#+ Section: !"$1 &opic: 8ar(et e fficiency

12-/


4%. &hat are the two primary lessons learne! from "apital market history' Bse histori"al information to :stify that these lessons are "orre"t. First, there is a rewar! for bearin$ risk, an! se"on!, the $reater the risk, the $reater the potential rewar!. As e#i!en"e, st!ents shol! pro#i!e a brief !is"ssion of the histori"al rates of retrn an! the relate! stan!ar! !e#iations of the #arios asset "lasses !is"sse! in the te9t. Fee!ba"k< +efer to se"tions 12. an! 12./

AACSB: eflectie thin(ing Bloom's: Comprehension Difficulty: )nterme*iate Learning Objectie: !"#" an* !"#% Section: !"$% an* !"$+ &opic: Capital mar(et history

4. How "an an in#estor lose money on a sto"k while makin$ money on a bon! in#estment if there is a rewar! for bearin$ risk' Arent sto"ks riskier than bon!s' There is a rewar! for bearin$ risk o#er the lon$-term. Howe#er, the natre of risk implies the retrns on a hi$h risk se"rity will be more #olatile than the retrns on a low risk se"rity. Ths, sto"ks "an pro!"e lower retrns in the short rn. ;t is the a""eptan"e of this risk that :stifies the potential lon$-term rewar!. Fee!ba"k< +efer to se"tion 12.

AACSB: eflectie thin(ing Bloom's: Analysis Difficulty: )nterme*iate Learning Objectie: !"#" Section: !"$% &opic: is( an* return

12-//


4. Shawn earne! an a#era$e retrn of 1/. per"ent on his in#estments o#er the past 28 years while the SO5 %88, a measre of the o#erall market, only retrne! an a#era$e of 1.6 per"ent. *9plain how this "an o""r if the sto"k market is effi"ient. An in#estor "an pr"hase se"rities that ha#e a hi$her le#el of risk than the o#erall market. ;n an effi"ient market, these se"rities will earn a hi$her retrn o#er the lon$-term as "ompensation for the assmption of the in"rease! risk. This is the first lesson of the "apital markets< There is a rewar! for bearin$ risk. Fee!ba"k< +efer to se"tion 12.

AACSB: eflectie thin(ing Bloom's: Analysis Difficulty: )nterme*iate Learning Objectie: !"#" an* !"#% Section: !"$% &opic: is( an* return

44. Do want to in#est in an in!e9 fn! whi"h !ire"tly "orrelates to the o#erall B.S. sto"k market. How "an yo !etermine if the market risk premim yo are e9pe"tin$ to earn is reasonable for the lon$-term' Do "ol! "ompare yor e9pe"tation to the histori"al market risk premim for the Bnite! States, as well as other in!striali3e! "ontries, reali3in$ of "orse, that the ftre will not be e9a"tly like the past. >e#ertheless, this shol! in!i"ate whether or not yor e9pe"tation is at least reasonable. Fee!ba"k< +efer to se"tion 12./

AACSB: eflectie thin(ing Bloom's: Analysis Difficulty: )nterme*iate Learning Objectie: !"#% Section: !"$+ &opic: 3istorical ris( premium

12-/%


Multiple Choice Questions

46. Sppose a sto"k ha! an initial pri"e of 748 per share, pai! a !i#i!en! of 71.% per share !rin$ the year, an! ha! an en!in$ share pri"e of 74. &hat was the "apital $ains yiel!' A. 1.%% per"ent (. 1.6 per"ent C. 4.8% per"ent D. 4.% per"ent *. 18.// per"ent Capital $ains yiel! J ?74 - 748748 J 4.% per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#" Learning Objectie: !"#! Section: !"$! &opic: Capital gains y iel*

68. Sppose yo bo$ht a 1% per"ent "opon bon! one year a$o for 76%8. The fa"e #ale of the bon! is 71,888. The bon! sells for 764% to!ay. ;f the inflation rate last year was 6 per"ent, what was yor total real rate of retrn on this in#estment' A. -/.44 per"ent (. -%.2 per"ent C. 6.1 per"ent ). 6.4 per"ent *. 18./ per"ent >ominal retrn J ?764% - 76%8 @ 71%876%8 J 8.16/ +eal retrn J ?1 @ 8.16/?1 @ 8.86 - 1 J 6.1 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#+ Learning Objectie: !"#! Section: !"$% &opic: Nominal an* real returns

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61. Cal"late the stan!ar! !e#iation of the followin$ rates of retrn<

A. 18.6 per"ent (. 12.8 per"ent C. 1./4 per"ent ). 1/./2 per"ent E. 1%.84 per"ent A#era$e retrn J ?8.8 @ 8.2% @ 8.1/ - 8.1% @ 8.1% J 8.86/ Stan!ar! !e#iation J √ 1?% - 1 ?8.8 - 8.86/ 2 @ ?8.2% - 8.86/2 @?8.1/ - 8.86/2 @?-8.1% 8.86/2 @ ?8.1 - 8.86/2 J 1%.84 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"# Learning Objectie: !"#! Section: !"$+ &opic: Stan*ar* *eiation

12-/


62. Do#e obser#e! the followin$ retrns on Crash-n-(rn Compters sto"k o#er the past fi#e years< 2 per"ent, -12 per"ent, 2 per"ent, 22 per"ent, an! 14 per"ent. &hat is the #arian"e of these retrns' A. 8.8288 B. 8.82%44 C. 8.812% ). 8.814/ *. 8.82 A#era$e J ?8.82 - 8.12 @ 8.2 @ 8.22 @ 8.14% J 8.11/ =arian"e J 1?% - 1 ?8.82 - 8.11/2 @ ?-8.12 - 8.11/2 @ ?8.2 - 8.11/2 @ ?8.22 - 8.11/2 @ ?8.14 - 8.11/2 J 8.82%44

AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#; Learning Objectie: !"#! Section: !"$+ &opic: ,ariance

6. Do#e obser#e! the followin$ retrns on Crash-n-(rn Compters sto"k o#er the past fi#e years<  per"ent, -18 per"ent, 2/ per"ent, 22 per"ent, an! 12 per"ent. Sppose the a#era$e inflation rate o#er this time perio! was . per"ent an! the a#era$e T-bill rate was /.4 per"ent. (ase! on this information, what was the a#era$e nominal risk premim' A. %.1% per"ent B. %./8 per"ent C. .81 per"ent ). . per"ent *. .8 per"ent A#era$e retrn J ?8.8 - 8.18 @ 8.2/ @ 8.22 @ 8.12% J 8.182 A#era$e nominal risk premim J 8.182 - 8.8/4 J %./8 per"ent

AACSB: Analytic Bloom's: Application Difficulty: Basic 2OC 9: !"#!< Learning Objectie: !"#! Section: !"$% &opic: Nominal ris( premium

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6/. Do bo$ht one of Ireat &hite Shark +epellant Co.s 18 per"ent "opon bon!s one year a$o for 78. These bon!s pay annal payments, ha#e a fa"e #ale of 71,888, an! matre 1/ years from now. Sppose yo !e"i!e to sell yor bon!s to!ay when the reire! retrn on the bon!s is 1/ per"ent. The inflation rate o#er the past year was . per"ent. &hat was yor total real retrn on this in#estment' A. 4.6 per"ent B. 6.11 per"ent C. 6.14 per"ent ). 6.// per"ent *. 6.%4 per"ent

>ominal retrn J ?7%6.62 - 78 @ 718878 J 8.11/ +eal retrn J ?1 @ 8.11/?1 @ 8.8 - 1 J 6.11 per"ent

AACSB: Analytic Bloom's: Analysis Difficulty: )nterme*iate 2OC 9: !"#!% Learning Objectie: !"#! Section: !"$% &opic: eal return

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6%. Do fin! a "ertain sto"k that ha! retrns of / per"ent, -% per"ent, -1% per"ent, an! 1 per"ent for for of the last fi#e years. The a#era$e retrn of the sto"k for the %-year perio! was 1 per"ent. &hat is the stan!ar! !e#iation of the sto"ks retrns for the fi#e-year perio!' A. 21.6 per"ent (. 2/.64 per"ent C. 2.1 per"ent D. 1.2 per"ent *. /.82 per"ent +etrn for missin$ year< 8.8/ - 8.8% - 8.1% @ 8.1 @ 9 J 8.1 × % 9 J % per"ent St! !e# J √ 1?% - 1 ?8.8/ - 8.1 2 @ ?-8.8% - 8.12 @ ?-8.1% - 8.12 @ ?8.1 - 8.12 @ ?8.% - 8.12 J 1.2 per"ent

AACSB: Analytic Bloom's: Analysis Difficulty: )nterme*iate 2OC 9: !"#!+ Learning Objectie: !"#% Section: !"$+ &opic: Stan*ar* *eiation

6. A sto"k ha! retrns of 12 per"ent, 1 per"ent, 1 per"ent, 16 per"ent, 1% per"ent, an! - per"ent o#er the last si9 years. &hat is the $eometri" a#era$e retrn on the sto"k for this perio!' A. 18.68 per"ent B. 11.14 per"ent C. 1.% per"ent ). 1/. per"ent *. 1%.81 per"ent Ieometri" a#era$e J ?1.12 × 1.1 × 1.1 × 1.16 × 1.1% × 8.6/1 - 1 J 11.14 per"ent

AACSB: Analytic Bloom's: Application Difficulty: )nterme*iate 2OC 9: !"#! Learning Objectie: !"#! Section: !"$ &opic: 0eometric aerage return

12-%8

Fundamentals of Finance Chapter 12 Test Bank

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