Chapter 12 - Fundamentals of Fin & Acct

If the risk-free rate is 2.2 percent, the inflation rate is 1.9 percent, and the market rate of return is 6.8 percent, what is the amount of the risk premium on a U.S. Treasury bill? - 4.3% - .5% - 2.8% - 1.7% - 0%

- 0%

Inside information has the least value when financial markets are: - Semiweak form efficient. - Weak form efficient. - Semistrong form efficient. - Inefficient. - Strong form efficient.

- Strong form efficient.

When attempting to forecast for extremely long intervals, such as 50 years, it is best to use: - Geometric Averages - Arithmetic Averages - Expected Return Averages - Forecasting Averages - Long Range Modeling Averages

- Geometric Averages

To convince investors to accept greater volatility, you must: - Decrease the real return. - Decrease the risk premium. - Decrease the risk-free rate. - Increase the risk premium. - Increase the risk-free rate.

- Increase the risk premium.

You've observed the following returns on Pryor Farm Produce stock over the past five years: 8 percent, −5 percent, 16 percent, 12 percent, and 8 percent. What is the variance of these returns? - .00836 - .00622 - .01684 - .07887 - .01725

- .00622

Connor Corp. has large amount of data that they are trying to analyze from the last 15 years. They have an arithmetic sales growth average of 12% and a geometric average growth of 9%. Using Blume's formula, what would the forecast sales growth be for the next five years? - 8.44% - 9.05% - 10.54% - 10.95% - 11.14%

- 11.14% R(5) = (5 − 1)/14 × 9% + (15 − 5)/14 × 12% R(5) = (4)/14 × .09 + (10)/14 × .12 R(5) = .0257 + .0857 R(5) = .1114 = 11.14%

A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 15 years. What is the estimated average rate of return for the next six years based on Blume's formula? - 15.18% - 14.79% - 14.96% - 15.28% - 15.42%

- 15.18% R(6) = [(6 − 1)/(15 − 1)](.146) + [(15 − 6)/(15 − 1)](.155) R(6) = .1518, or 15.18%

A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. - 5.40; 4.86 - 5.62; 5.03 - 5.80; 4.86 - 5.40; 5.03 - 5.80; 5.03

- 5.40; 4.86 Arithmetic average = (.05 + .21 − .12 + .07 + .06)/5 Arithmetic average = .054, or 5.4% Geometric return = [1.05(1.21)(.88)(1.07)(1.06)].20 − 1 Geometric return = .0486, or 4.86%

You bought one of Carvalho Corporation's 6 percent coupon bonds one year ago for $867. These bonds pay annual payments, have a face value of $1,000, and mature 12 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 7.4 percent. The inflation rate over the past year was 2.9 percent. What was your total real return on this investment? - 6.48% - 6.61% - 7.44% - 9.70% - 8.18%

- 6.61% P = $60[(1 − 1/1.07412)/.074] + $1,000/1.07412 P = $891.13 Nominal return = ($891.13 − 867 + 60)/$867 Nominal return = .097, or 9.7% Real return = 1.097/1.029 − 1 Real return = .0661, or 6.61%

Which one of the following statements best defines the efficient market hypothesis? - Security prices in efficient markets remain steady as new information becomes available. - Efficient markets limit competition. - Mispriced securities are common in efficient markets. - All securities provide the same positive rate of return when the market is efficient. - All securities in an efficient market are zero net present value investments.

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

For the period 2009-2019, U.S. Treasury bills had an annual rate of return that was: - Between .5 and 1 percent. - Between 1 and 2 percent. - Between 0 and 2.5 percent. - Negative for two or more years. - Negative in at least one year.

- Between 0 and 2.5 percent.

The arithmetic average tells you what you actually earned per year on average, whereas the geometric average tells you what you earned in a typical year. - True - False

- False The arithmetic average tells you what you earned in a typical year, whereas the geometric average tells you what you actually earned per year on average. The definitions are reversed in the question.

Generally speaking, which of the following best correspond to a wide frequency distribution? - Small risk premium, low standard deviation - High standard deviation, low rate of return - Low rate of return, large risk premium - Small risk premium, high rate of return - High standard deviation, large risk premium

- High standard deviation, large risk premium

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year? - More than 16 percent - Less than 1 percent but more than .5 percent - Less than 2.5 percent but more than .5 percent - Less than .5 percent - Less than 16 percent but more than 2.5 percent

- Less than 16 percent but more than 2.5 percent

Individual investors who continually monitor the financial markets seeking mispriced securities: - Are overwhelmingly successful in earning abnormal profits. - Are always quite successful using only historical price information as their basis of evaluation. - Earn excess profits on all of their investments. - Are never able to find a security that is temporarily mispriced. - Make the markets increasingly more efficient.

- Make the markets increasingly more efficient.

Which one of the following best defines the variance of an investment's annual returns over a number of years? - The average difference between the annual returns and the average return for the period - The average squared difference between the actual returns and the arithmetic average return - The average squared difference between the arithmetic and the geometric average annual returns - The squared summation of the differences between the actual returns and the average geometric return - The difference between the arithmetic average and the geometric average return for the period

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

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment? - The dividend yield is greater than the capital gains yield. - The capital gains yield is positive. - The capital gain would have been less had Vanessa not received the dividends. - The total dollar return per share is $.55. - The dividend yield is expressed as a percentage of the par value.

- The capital gains yield is positive.

Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: - decreased by $.35 per share. - decreased proportionately with the dividend decrease. - increased proportionately with the dividend decrease. - increased by $.35 per share. - was unaffected by the announcement.

- decreased proportionately with the dividend decrease.

Over the past four years, Preston's investment account earned annual returns of 6.5 percent, −24 percent, 12.5 percent, and 21.2 percent. To determine the compound annual growth rate of the investment account, he should use the ________ average of ________ percent. - arithmetic; 16.05 - geometric; 4.28 - arithmetic; 4.05 - geometric; 15.84 - geometric; 2.50

- geometric; 2.50 Geometric average = [1.065(.76)(1.125)(1.212)]1/4 − 1 Geometric average =.0250, or 2.50%

Six months ago, you purchased 500 shares of stock in Szeto Worldwide at a price of $27.84 per share. The stock pays a quarterly dividend of $1.85 per share. Today, you sold all of your shares for $33.20 per share. What is the total amount of your dividend income on this investment? - $2,680 - $3,700 - $6,380 - $370 - $1,850

- $1,850 Dividend income = $1.85(2)(500) Dividend income = $1,850

One year ago, you purchased a stock at a price of $43.20 per share. The stock pays quarterly dividends of $.18 per share. Today, the stock is selling for $45.36 per share. What is your capital gain on this investment? - $2.16 - $1.74 - $2.34 - $2.80 - $1.44

- $2.16 Capital gain = $45.36 − 43.20 Capital gain = $2.16

For the period 1926-2019, U.S. Treasury bills always: - earned a higher annual rate of return than long-term government bonds. - had a greater variation in returns year-over-year than did long-term government bonds. - provided a positive annual rate of return. - had an annual rate of return in excess of 1.2 percent. - provided an annual rate of return that exceeded the annual inflation rate.

- provided a positive annual rate of return.

Small-company stocks, as the term is used in the textbook, are best defined as the: - 500 newest corporations in the U.S. - smallest 25 percent of the companies listed on Nasdaq. - companies whose stock is listed on Nasdaq. - companies whose stock trades OTC. - smallest 20 percent of the companies listed on the NYSE.

- smallest 20 percent of the companies listed on the NYSE.