FIN 320 Ch.10

Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns?

. Small-company stocks

Which one of the following could cause the total return on an investment to be a negative rate?

. Stock price that declines over the investment period

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk

. lower; lower

Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are:

. strong form efficient.

Over the period of 1926-2011,,

. the risk premium on stocks exceeded the risk premium on bonds

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

Available information

Which one of the following is defined as the average compound return earned per year over a multiyear period?

Geometric average return

. Percentage returns I. are easy to understand. II. relay information about a security more easily than dollar returns do. III. are not affected by the amount of the investment. IV. can be easily separated into dividend yield and capital gain yield

I, II, III, and IV

When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?

Never

Which one of the following best describes an arithmetic average return?

Return earned in an average year over a multiyear period

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

The dollar return is dependent on the size of the investment while the percentage return is not

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

The price of New Labs stock increases rapidly to a higher price and then remains at that price.

The rate of return on ______________ is used as the risk-free rate?

U.S. Treasury bill

Which of the following had the lowest standard deviation of returns for the period of 1926-2011?

U.S. Treasury bill

For the period 1926-2011, which one of the following had the smallest risk premium?

U.S. Treasury bills

. Semi-strong form market efficiency states that the value of a security is based on:

all publicly available information.

Over the period of 1926-2011,

long-term government bonds underperformed long-term corporate bonds.

If the financial markets are semi-strong form efficient, then:

only individuals with private information have a marketplace advantage

Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

risk premium

If the financial markets are efficient then:

stock prices should respond only to unexpected news and events

One year ago, you purchased 100 shares of a stock. This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the:

sum of the dividend yield and the capital gains yield is 8.2 percent.

The standard deviation measures the _____ of a security's returns over time.

volatility