finance chapter 12

One year ago, you purchased 100 shares of Best Wings stock at a price of $38.19 a share. The company pays an annual dividend of $.46 per share. Today, you sold for the shares for $37.92 a share. What is your total percentage return on this investment?

.50 percent Total percentage return = ($37.92 − 38.19 + .46)/$38.19 Total percentage return = .0050, or .50%

The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2016.

5

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 is correct based on the historical record for the period 1926-2016?

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

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

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share 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 semistrong form efficient.

The information was expected.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016?

U.S. Treasury bills

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

Volatility

The excess return is computed as the:

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

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

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

weak

Leo purchased a stock for $63.80 a share, received a dividend of $2.68 a share and sold the shares for $59.74 each. During the time he owned the stock, inflation averaged 2.8 percent. What is his approximate real rate of return on this investment?

−4.96 percent Nominal return = ($59.74 − 63.80 + 2.68)/$63.80 Nominal return = −.0216, or −2.16% Approximate real return = −.0216 − .028 Approximate real return = −.0496, or −4.96%