FIN 550 Chapter 12 Concept

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

Geometric

To convince investors to accept greater volatility, you must:

Increase the risk premium.

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Weak

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?

Efficient capital market

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

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.

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

Zero net present values for all stock investments

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 time periods is associated with low rates of inflation?

2010-2013

The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2013.

5

Based on the period 1926-2013, the actual real return on large-company stocks has been around:

8.3 percent

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 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.

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

Arithmetic

What was the highest annual rate of inflation during the period 1926-2013?

Between 15 and 20 percent

What was the average rate of inflation over the period of 1926-2013?

Between 2.8 and 3.2 percent

Assume you invest in a portfolio of U. S. Treasury bills and that the portfolio will earn a rate of return similar to the average return on U.S. Treasury bills for the period 1926-2013. What rate of return should you expect to earn?

Between 3 and 4 percent

Which of the following statements are true based on the historical record for 1926-2013?

Bonds are generally a safer investment than are stocks.

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

C. Smallest twenty percent of the firms listed on the NYSE.

Which of the following yields on a stock can be negative?

Capital gains yield and total return

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following to occur as a result?

Decrease in the 68 percent probability range of returns

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.

Generally speaking, which of the following most 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

High standard deviation, large risk premium

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

Ineffective .

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 statements is correct based on the historical record for the period 1926-2013?

Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.

Which one of the following statements is correct based on the period 1926-2013?

Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.

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

Individual investors who continually monitor the financial markets seeking mispriced securities:

Make the markets increasingly more efficient.

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.

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

Minus the inflation rate.

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; underestimate

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.

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.

Semi strong

Which one of the following categories of securities had the highest average return for the period 1926-2013?

Small company stocks

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013?

Small-company stocks

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

Small-company stocks

The historical record for the period 1926-2013 supports which one of the following statements?

Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

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

Inside information has the least value when financial markets are:

Strong form efficient.

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2013?

The annual rate of return was always positive.

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $.75 in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

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 semi strong form efficient.

The information was expected

Efficient financial markets fluctuate continuously because:

The markets are continually reacting to new information.

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 had the least volatile annual returns over the period of 1926-2013?

U.S. Treasury bills

Which one of the following statements correctly applies to the period 1926-2013?

U.S. Treasury bills had a positive average real rate of return.

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.

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

Volatility