Ch. 12 Financial Management

The markets are continually reacting to new information.

Efficient financial markets fluctuate continuously because:

Overestimate; underestimate

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.

Make the markets increasingly more efficient.

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

strong for efficient

Inside information has the least value when financial markets are:

Risk premium

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?

6.96 percent

Leo purchased a stock for $47.10 a share, received a $1.74 dividend per share and sold the shares for $50.10 a share. During the time he owned the stock, inflation averaged 3.1 percent. What is his approximate real rate of return on this investment?

-11.50 percent

One year ago, you purchased 100 shares of Best Wings stock at a price of $49.65 a share. The company pays an annual dividend of $.64 per share. Today, you sold for the shares for $43.30 a share. What is your total percentage return on this investment?

30

Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $.15 a share. Today, you sold all of your shares for $40.10 per share. What is the total amount of your dividend income on this investment?

The capital gains yield is 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?

Volatility

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

8.75 percent

Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield?

7.61 percent

Suppose you bought a 6 percent coupon bond one year ago for $950. The face value of the bond is $1,000. You sold the bond today for $994. If the inflation rate last year was 3.1percent, what was your total real rate of return on this investment?

strong

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.

geometric

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

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

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

Project future rates of return.

The primary purpose of Blume's formula is to:

Minus the inflation rate.

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

arithmetic

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

Increase the risk premium.

To convince investors to accept greater volatility, you must:

4.06 percent

Today, you sold 300 shares of stock and realized a total return of 5.2 percent. You purchased the shares one year ago at a price of $28 a share and have received a total of $96in dividends. What is your capital gains yield on this investment?

$307.20

West Wind Tours stock is currently selling for $48 a share. The stock has a dividend yield of 3.2 percent. How much dividend income will you receive per year if you purchase 200 shares of this stock?

Next year's annual dividend divided by today's stock price.

Which one of the following correctly describes the dividend yield?

Small-company stocks

Which one of the following earned the highest risk premium over 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?

Normal distribution

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

8.28 percent

A stock had annual returns of 6 percent, 13 percent, 11 percent, -8 percent, and3 percent for the past five years, respectively. What is the standard deviation of returns for this stock?

Less than

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

8.8 percent

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

9.75 percent

Christina purchased 200 shares of stock at a price of $62.30 a share and sold them for $70.25 a share. She also received $148 in dividends. If the inflation rate was 4.2 percent, What was her approximate real rate of return on this investment?

Small-company stocks

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

-26.74 to 40.74percent

A stock had annual returns of 16 percent, 8 percent, -17 percent, and 21 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

.5 percent

A stock has an expected rate of return of 13 percent and a standard deviation of 21 percent. Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year?

Decreased proportionately with the dividend decrease.

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:

High standard deviation, large risk premium

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

$1,356

One year ago, you purchased 400 shares of SL Industries stock at a price of $26.15a share. The stock pays an annual dividend of $1.34 per share. Today, you sold all of your shares for $28.20 per share. What is your total dollar return on this investment?

3.46 percent

One year ago, you purchased a stock at a price of $49.60 a share. Today, you sold the stock and realized a total loss of 16.54 percent. Your capital gain was -$9.92 a share. What was your dividend yield?

5

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.

Zero net present values for all stock investments

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

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

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

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

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

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

Which one of the following statements is a correct reflection of the U.S. markets 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 historical record for 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 statements is correct based on the period 1926-2013?

2010-2013

Which one of the following time periods is associated with low rates of inflation?

Semi strong

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.

-2.02 percent

You bought one of Shark Repellant's 8 percent coupon bonds one year ago for $802. These bonds pay annual payments, have a face value of $1,000, and mature 14 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 12 percent. The inflation rate over the past year was 3.7 percent. What was your total real return on this investment?

21.22 percent

You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16 percent for four of the last five years. The average return of the stock for the past year-year period was 8 percent. What is the standard deviation of the stock's returns for the 5-year period?

2.93 percent

You own 1,200 shares of Western Feed Mills stock valued at $46.80 per share. What is the dividend yield if your annual dividend income is $1,644?

Efficient capital market

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?

Ineffective .

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

Markets tend to respond quickly to new information.

Which one of the following statements related to market efficiency tends to be supported by current evidence?

-$738

Four months ago, you purchased 1,200 shares of LBM stock for $9.30 a share. Last month you received a dividend payment of $.065 a share. Today, you sold the shares for $8.62 a share. What is your total dollar return on this investment?

3.80 percent

Over the past four years a stock had prices of $15.40, $15.85, $16.30, and $15.70, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock?

0

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

16

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

Between 2.8 and 3.2 percent

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

Bonds are generally a safer investment than are stocks.

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

Capital gains yield and total return

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

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

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

U.S. Treasury bills

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013?