FIN 435: Chapter 12

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.

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

arithmetic

The primary purpose of Blume's formula is to:

project future rates of return.

The excess return is computed as the:

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

Inside information has the least value when financial markets are:

strong form efficient.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

Standard deviation is a measure of which one of the following?

volatility

If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

weak

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

zero net present values for all stock investments

According to Jeremy Siegel, the real return on stocks over the long-term has averaged about:

6.8 percent

Which one of the following statements is correct?

The greater the volatility of returns, the greater the risk premium.

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

16 percent

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

All securities in an efficient market are zero net present value investments.

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.

Which of the following statements is correct in relation to a stock investment? I. The capital gains yield can be positive, negative, or zero. II. The dividend yield can be positive, negative, or zero. III. The total return can be positive, negative, or zero. IV. Neither the dividend yield nor the total return can be negative.

I and III only

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.

I, II, and III only

If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result? I. decrease in the average rate of return II. increase in the risk premium III. increase in the 68 percent probability range of the frequency distribution of returns IV. decrease in the standard deviation

II and III only

Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium

III and IV only

Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released? I. insiders knew the information prior to the announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated

III and IV only

Which one of the following best defines the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return.

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?

The capital gains yield is positive.

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

decreased proportionately with the dividend decrease.

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?

efficient capital market

The average compound return earned per year over a multi-year period is called the _____ average return.

geometric

To convince investors to accept greater volatility, you must:

increase the risk premium.

According to theory, studying historical stock price movements to identify mispriced stocks:

is ineffective even when the market is only weak form efficient.

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

Individuals who continually monitor the financial markets seeking mispriced securities:

make the markets increasingly more efficient.

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

minus the inflation rate.

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 is defined by its mean and its standard deviation?

normal distribution

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 while estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

overestimate; underestimate

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

risk premium

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

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

smallest twenty percent of the firms listed on the NYSE.

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