FINANCE final exam ch 10 test bank

When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? A. When the set of returns includes only risk-free rates. B. When the set of returns has a wide frequency distribution. C. When the set of returns has a very narrow frequency distribution. D. When all of the rates of return in the set of returns are equal to each other. E. Never

E. never

Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? A. Arithmetic average return B. Variance C. Standard deviation D. Probability curve E. Normal distribution

E. normal distribution

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? A. Inflation premium B. Required return C. Real return D. Average return E. Risk premium

E. risk premium

If the financial markets are efficient then: A. stock prices should remain constant. B.stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. C. an increase in the value of one security should be offset by a decrease in the value of another security. D. stock prices will only change when an event actually occurs, not at the time the event is anticipated. E. stock prices should only respond to unexpected news and events.

E. stock prices should only respond to unexpected news and events

The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the: A. largest 20 percent of the stocks traded on the NYSE. B. stock returns for the largest 10 percent of the publicly traded firms in the U.S. C. returns of the 100 largest firms in the U.S. D. returns of all of the stocks listed on the NYSE. E. stocks of the 500 companies included in the S&P 500 index.

E. stocks of the 500 companies included in the S&P 500 index

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: A. stock price increased by 8.2 percent over the last year. B. stock increased in value over the past year. C. stock paid a dividend. D. dividend yield is greater than zero. E. sum of the dividend yield and the capital gains yield is 8.2 percent.

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

Which one of the following had the lowest standard deviation of returns for the period of 1926 - 2008? A. U.S. Treasury bill B. Inflation C. Long-term corporate bonds D. Large-company stocks E. Long-term government bonds

A. U.S. treasury bill

The variance is the average squared difference between which of the following? A. Actual return and average return B. Actual return and (average return/N - 1) C. Actual return and the real return D. Average return and the standard deviation E. Actual return and the risk-free rate

A. actual return and average return

Which one of the following is defined as the average compound return earned per year over a multiyear period? A. Geometric average return B. Variance of returns C. Standard deviation of returns D. Arithmetic average return E. Normal distribution of returns

A. geometric average return

Over the period of 1926-2008: A. long-term government bonds underperformed long-term corporate bonds. B. small-company stocks underperformed large-company stocks. C. inflation exceeded the rate of return on U.S. Treasury bills. D. U.S. Treasury bills outperformed long-term government bonds. E. large-company stocks outperformed all other investment categories.

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

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. A. lower; lower B. lower; higher C. higher; lower D. higher; higher E. You cannot determine anything about the expected rate of return from the standard deviation.

A. lower; lower

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2008? A. Small-company stocks B. U.S. Treasury bills C. Long-term government bonds D. Inflation E. Large-company stock

A. small-company stocks

Which one of the following is the positive square root of the variance? A. Standard deviation B. Mean C. Risk-free rate D. Average return E. Real return

A. standard deviation

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment? A. The dollar return is dependent on the size of the investment while the percentage return is not. B The dollar return is more accurate than the percentage return because the dollar return includes . dividend income while the percentage return does not. C. The dollar return considers the time value of money while the percentage return does not. D. Dollar returns are based on capital gains while percentage returns are based on the total rate of return. E. Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive.

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

If the financial markets are semi-strong form efficient, then: A. only the most talented analysts can determine the true value of a security. B. only individuals with private information have a marketplace advantage. C. technical analysis provides the best tool to use to gain a marketplace advantage. D. no one individual has an advantage in the marketplace. E. every security offers the same rate of return.

B. only individuals with private information have a marketplace advantage

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: A. weak form efficient. B. strong form efficient. C. semistrong form efficient. D. efficient at any level. E. aware that the trader is an insider.

B. strong form efficient

Which one of the following statements is true regarding the period 1926-2008? A. The returns on small-company stocks were less volatile than the returns on large-company stocks. B. The risk-free rate of return remained constant over the time period. C. U.S. Treasury bills had a positive average real rate of return. D. Bonds had an average rate of return that exceeded the average return on stocks. E. The inflation rate was just as volatile as the return on long-term bonds.

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

The historical record for the period 1926-2008 shows that the annual nominal rate of return on: A. risk-free securities has averaged around 5 percent. B. the Consumer Price Index has been positive every year. C. U.S. Treasury bills have had a positive rate of return for every year in the period. D. U.S. Treasury bills is constant. E. large company stocks has averaged around 9 percent.

C. U.S. treasury bills have had a positive rate of return for every year in the period

According to the Efficient Market Hypothesis, professional investors will earn: A. excess profits over the long-term. B. excess profits, but only on short-term investments. C. a dollar return equal to the value paid for an investment. D.a return that cannot be accurately predicted because investments are subject to the random movements of the markets. E. a return that "beats the market".

C. a dollar return equal to the value paid for an investment

Semi-strong form market efficiency states that the value of a security is based on: A. all public and private information. B. historical information only. C. all publicly available information. D. all publicly available information plus any data that can be gathered from insider trading. E. random information with no clear distinction as to the source of that information.

C. all publicly available information

An efficient capital market is best defined as a market in which security prices reflect which one of the following? A. Current inflation B. A risk premium C. Available information D. The historical arithmetic rate of return E. The historical geometric rate of return

C. available information

The period 1926-2008 illustrates that U.S. Treasury bills: A. outperform inflation by approximately 1 percent every year. B. have a zero standard deviation. C. can either outperform or underperform inflation on an annual basis. D. produce a rate of return roughly equivalent to the rate of return on long-term government bonds. E. routinely have negative annual returns.

C. can either outperform or underperform inflation on an annual basis

Which one of the following is the hypothesis that securities markets are efficient? A. Geometric market hypothesis B. Standard deviation hypothesis C. Efficient markets hypothesis D. Capital market hypothesis E. Financial markets hypothesis

C. efficient markets hypothesis

Which one of the following has the narrowest distribution of returns for the period 1926-2008? A. Long-term corporate bonds B. Long-term government bonds C. Intermediate-terms government bonds D. Large-company stocks E. Small-company stocks

C. intermediate-terms government bonds

Over the period of 1926-2008, which one of the following investment classes had the highest volatility of returns? A. Large-company stocks B. U.S. Treasury bills C. Small-company stocks D. Long-term corporate bonds E. Long-term government bonds

C. small-company stocks

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? A. The price of New Labs stock remains unchanged. B. The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. C. The price of New Labs stock increases rapidly to a higher price and then remains at that price. D. All stocks quickly increase in value and then all but New Labs stock fall back to their original values. E. The value of all stocks suddenly increase and then level off at their higher values.

C. the price of new labs stock increases rapidly to a higher price and then remains at that price

The standard deviation measures the _____ of a security's returns over time. A. average value B. frequency C. volatility D. mean E. arithmetic average

C. volatility

What was the average annual risk premium on small-company stocks for the period 1926-2008? A. 5.3 percent B. 6.2 percent C. 8.5 percent D. 12.6 percent E. 15.3 percent

D. 12.6 percent

What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed? A. 0.05 percent B. 0.5 percent C. 1.0 percent D. 2.5 percent E. 5.0 percent

D. 2.5 percent

The rate of return on which one of the following is used as the risk-free rate? A. Long-term government bonds B. Long-term corporate bonds C. Inflation, as measured by the Consumer Price Index D. U.S. Treasury bill E. Large-company stocks

D. U.S. treasury bill

For the period 1926-2008, which one of the following had the smallest risk premium? A. Large-company stocks B. Small-company stocks C. Long-term corporate bonds D. U.S. Treasury bills E. Long-term government bonds

D. U.S. treasury bills

Based on the period 1926-2008, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk? A. Between 0 and 1 percent B. Between 1 and 2 percent C. Between 2 and 3 percent D. Between 3 and 4 percent E. Between 4 and 5 percent

D. between 3 and 4 percent

Which one of the following combinations will always result in an increased dividend yield? A. Increase in the stock price combined with a lower dividend amount B. Increase in the stock price combined with a higher dividend amount C. Decrease in the stock price combined with a lower dividend amount D. Decrease in the stock price combined with a higher dividend amount E. Increase in the stock price combined with a constant dividend amount

D. decrease in the stock price combined with a higher dividend amount

Which one of the following best describes an arithmetic average return? A. Total return divided by N - 1, where N equals the number of individual returns B. Average compound return earned per year over a multiyear period C. Total compound return divided by the number of individual returns D. Return earned in an average year over a multiyear period E. Positive square root of the average compound return

D. return earned in an average year over a multiyear period

Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2008? A. U.S. Treasury bills B. Large-company stocks C. Long-term government debt D. Small-company stocks E. Long-term corporate debt

D. small-company stocks

Which one of the following could cause the total return on an investment to be a negative rate? A. Constant annual dividend amount B. Increase in the annual dividend amount C. Stock price that remains constant over the investment period D. Stock price that declines over the investment period E. Stock price that increases over the investment period

D. stock price that declines over the investment period

Which one of the following statements is correct? A. The risk-free rate of return has a risk premium of 1.0. B. The reward for bearing risk is called the standard deviation. C. Risks and expected return are inversely related. D. The higher the expected rate of return, the wider the distribution of returns. E. Risk premiums are inversely related to the standard deviation of returns.

D. the higher the expected rate of return, the wider the distribution of returns

Assume the securities markets are strong-form efficient. Given this assumption, you should expect which one of the following to occur? A. The risk premium on any security in that market will be zero. B. The price of any one security in that market will remain constant at its current level. C. Each security in the market will have an annual rate of return equal to the risk-free rate. D. The price of each security in that market will frequently fluctuate. E. The prices of each security will fall to zero because the net present value of the investments will be zero.

D. the price of each security in that market will frequently fluctuate

The average risk premium on long-term government bonds for the period 1926-2008 was equal to: A. zero. B. one percent. C. the rate of return on the bonds plus the corporate bond rate. D. the rate of return on the bonds minus the T-bill rate. E. the rate of return on the bonds minus the inflation rate.

D. the rate of return on the bonds minus the T-bill rate

Over the period of 1926-2008: A. the risk premium on large-company stocks was greater than the risk premium on small- company stocks. B. U.S. Treasury bills had a risk premium that was just slightly over 2 percent. C. the risk premium on long-term government bonds was zero percent. D. the risk premium on stocks exceeded the risk premium on bonds. E. U. S. Treasury bills had a negative risk premium.

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

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. A. II and III only B. I and III only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

E. I, II, III, and IV