FIN 300 CHAPTER 12

To convince investors to accept greater volatility, you must:

Increase the risk premium.

Evidence seems to support the view that studying public information to identify mispriced stocks is:

Ineffective .

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

Minus the inflation rate.

The excess return is computed as the:

Return on a risky security minus the risk-free rate.

One year ago, you purchased 400 shares of SL Industries stock at a price of $26.15a share. The stock pays an annual dividend of $1.34 per share. Today, you sold all of your shares for $28.20 per share. What is your total dollar return on this investment?

Total dollar return = ($28.20 - 26.15 + 1.34) �400 = $1,356

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?

0 percent There is no excess return, or risk premium, for a risk-free security such as the T-bill.

A stock had returns of 6 percent, -22 percent, 18percent, 12 percent, and -2 percent over the past five years. What is the standard deviation of these returns?

15.52 percent

A stock had annual returns of 6 percent, 13 percent, 11 percent, -8 percent, and3 percent for the past five years, respectively. What is the standard deviation of returns for this stock?

8.28 percent get mean minus each by the mean then square

Which one of the following statements is correct concerning market efficiency?

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

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

An increase in an unrealized capital gain will increase the capital gains yield.

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.

Arithmetic average = (.05 + .21- .12 + .07 - .06)/5 =.03, or 3 percent Geometric return = (1.05 ×1.21 ×.88 ×1.07 ×.94).20 - 1 = .0237, or 2.37 percent

A stock has annual returns of 5.4 percent, 12.9 percent, -3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

Arithmetic average = (.054 + .129 - .038+ .094)/4 = .0598, or 5.98 percent Geometric return = (1.054 ×1.129 ×.962 ×1.094).25 - 1 = .0579. or 5.79 percent

One year ago, you purchased a stock at a price of $32.15. The stock pays quarterly dividends of $.20 per share. Today, the stock is selling for $33.09 per share. What is your capital gain on this investment?

Capital gain = $33.09-32.15 = $.94

Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield?

Capital gains yield = ($87 - 80)/$80 = .0875, or 8.75 percent

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?

Geometric average = (1.12 �1.16 �1.10 �1.19 �1.15 �.94)^1/6 - 1 = .1068, or 10.68 percent

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

Less than.

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2013? Rank from highest to lowest.

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Markets tend to respond quickly to new information.

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price.

Which one of the following earned the highest risk premium over the period 1926-2013?

Small-company stocks

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.

Strong

One year ago, you purchased 100 shares of Best Wings stock at a price of $49.65 a share. The company pays an annual dividend of $.64 per share. Today, you sold for the shares for $43.30 a share. What is your total percentage return on this investment?

Total percentage return = ($43.30 - 49.65 + .64)/$49.65 = -.1150, or -11.50 percent

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013?

U.S. Treasury bills

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2013?

U.S. Treasury bills provided a positive rate of return each and every year during the period.

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

Zero net present values for all stock investments