Chapter 12 Finance

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? Riskless market Evenly distributed market Zero volatility market Blume's market Efficient capital market

Efficient capital market

Generally speaking, which of the following best correspond to a wide frequency distribution? High standard deviation, low rate of return Low rate of return, large risk premium Small risk premium, high rate of return Small risk premium, low standard deviation High standard deviation, large risk premium

High standard deviation, large risk premium

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016? Long-term corporate bonds Large-company stocks Intermediate-term government bonds U.S. Treasury bills Small-company stocks

Small-company stocks

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. Company insiders were aware of the information prior to the announcement. Investors do not pay attention to daily news. Investors tend to overreact. The news was positive. The information was expected.

The information was expected.

Standard deviation is a measure of which one of the following? Average rate of return Volatility Probability Risk premium Real returns

Volatility

The return earned in an average year over a multiyear period is called the _____ average return. arithmetic standard variant geometric real

arithmetic

The average compound return earned per year over a multiyear period is called the _____ average return. = arithmetic standard variant geometric real

geometric

To convince investors to accept greater volatility, you must: decrease the risk premium. increase the risk premium. decrease the real return. decrease the risk-free rate. increase the risk-free rate.

increase the risk premium.

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient. weak semiweak semistrong strong perfect

strong

Inside information has the least value when financial markets are: weak form efficient. semiweak form efficient. semistrong form efficient. strong form efficient. inefficient.

strong form efficient.

Efficient financial markets fluctuate continuously because: the markets are continually reacting to old information as that information is absorbed. the markets are continually reacting to new information. arbitrage trading is limited. current trading systems require human intervention. investments produce varying levels of net present values.

the markets are continually reacting to new information.

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

A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.

Estimates of the rate of return on a security based on the 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. overestimate; overestimate overestimate; underestimate underestimate; overestimate underestimate; underestimate accurately estimate; accurately estimate

overestimate; underestimate

Small-company stocks, as the term is used in the textbook, are best defined as the: 500 newest corporations in the U.S. companies whose stock trades OTC. smallest 20 percent of the companies listed on the NYSE. smallest 25 percent of the companies listed on NASDAQ. companies whose stock is listed on NASDAQ.

smallest 20 percent of the companies listed on the NYSE.