Finance CH. 12 Some Lessons from Capital Market History

35. 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

C. II and III only

23. Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2007?

C. The annual rate of return was always positive.

11. 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:

C. decreased proportionately with the dividend decrease.

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

C. less than

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

C. minus the inflation rate.

Which one of the following is defined by its mean and its standard deviation?

C. normal distribution

Which one of the following categories of securities had the highest average return for the period 1926- 2007?

C. small company stocks

24. Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2007? Rank from highest to lowest.

C. small company stocks, long-term corporate bonds, intermediate-term government bonds

27. Which one of the following earned the highest risk premium over the period 1926-2007?

C. small-company 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.

36. Which one of the following statements is correct based on the historical record for the period 1926-2007?

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

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

D. 16 percent

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

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

39. The historical record for the period 1926-2007 supports which one of the following statements?

D. It is possible for small-company stocks to more than double in value in any one given year.

9. 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?

D. The capital gains yield is positive.

Which one of the following was the least volatile over the period of 1926-2007?

D. U.S. Treasury bills

25. What was the highest annual rate of inflation during the period 1926-2007?

D. between 10 and 15 percent

What was the average rate of inflation over the period of 1926-2007?

D. between 3.0 and 3.5 percent

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

D. geometric

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

E. III and IV only

19. Which one of the following categories of securities had the lowest average risk premium for the period 1926-2007?

E. U.S. Treasury bills

Which one of the following statements correctly applies to the period 1926-2007?

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

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?

E. efficient capital market

20. Which one of the following categories of securities has had the most volatile returns over the period 1926-2007?

E. small-company stocks

2. 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.

1. 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

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

A. 6.8 percent

32. Which one of the following statements is correct?

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

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

A. arithmetic

Which one of the following correctly describes the dividend yield?

A. next year's annual dividend divided by today's stock price

30. The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2007.

B. 5

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

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

40. Which of the following statements are true based on the historical record for 1926-2007? I. Risk and potential reward are inversely related. II. Risk-free securities produce a positive real rate of return each year. III. Returns are more predictable over the short-term than they are over the long-term. IV. Bonds are generally a safer investment than are stocks.

B. IV only

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926- 2007?

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

29. Assume that you invest in a portfolio of large-company stocks. Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2007. What rate of return should you expect to earn?

B. between 10 and 12.5 percent

To convince investors to accept greater volatility, you must:

B. increase the risk premium.

26. The excess return is computed as the:

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

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

B. volatility

22. Which one of the following time periods is associated with high rates of inflation?

C. 1978-1981

Which of the following statements is correct in relation to a stock investment?

C. I and III only