FRL 301 Chapter 12

semi-strong form efficiency

--Prices reflect all publicly available information including trading information, annual reports, press releases, etc. --Insiders make profit, but not fundamental analysis, or technical analysis

risk premium

--excess return; "extra" return earned for taking on risk --Risk Premium=Return on Risky Assets-Risk Free Return

geometric average

--the average compound return earned per year over a multi-year period is called the --overly pessimistic for short horizons

strong form efficiency

Prices reflect all information, including public and private; even insiders can not make abnormal returns.

weak form efficiency

Prices reflect all past market information such as price and volume. Insiders and fundamental analysis make profit, but not technical analysis

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

US treasury bills

efficient market hypothesis

all securities in an efficient market are zero net present value investments

capital gains

an increase in an unrealized capital gain will increase the capita gains yield

what was the highest annual rate of inflation during the period 1926-2007

between 10-15%

what was the average rate of inflation over the period of 1926-2007

between the 3-3.5%

Which of the following statements are true based on the historical record for 1926-2007

bonds are generally a safer investment than are stocks

to convince investors to accept greater volatility, you must:

increase the risk premium

According to theory, studying historical stock price movements to identify mis-priced stocks

is ineffective even when the market is only weak form efficient

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

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

which one of the following earned the highest risk premium over the period 1926-2007

small-company stocks

small-company stocks

smallest 20% of the firms listed on the NYSE

standard deviation is a measure of

volatility

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

zero net present values for all stock investments

arithmetic average

--the return earned in an average year over a multi-year period is called the... --overly optimistic for long horizons

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

-increase in the risk premium -increase in the 68% probability range of the frequency distribution of returns

Which of the following statements related to market efficiency tend to be supported by current evidence

-markets tend to respond quickly to new information -it is difficult for investors to earn abnormal returns -short-run prices are difficult to predict accurately based on public information

Which of the following correspond to a wide frequency distribution

-relatively high standard deviation and large risk premium

Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released?

-the information has no bearing on the value of the firm -the information was anticipated

the three forms of market efficiency

1. strong form efficiency 2. weak form efficiency 3. semi-strong form efficiency

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

16%

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

1978-1981

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.

5%

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

6.8%

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

US Treasury bills

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

US Treasury bills had a positive average real rate of return

Which one of the following statements is a correct reflection of the US markets for the period 1926-2007

US Treasury bills provided a positive rate of return each and every year during the period

Which one of the following statements is correct concerning market efficiency

a firm will generally receive a fair price when it issues new shares of stock

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

less than

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

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

individuals who continually monitor the financial markets seeking mispriced securities

make the markets increasingly more efficient

charges individuals with insider trading and claims individuals have made unfair profits

markets are strong from efficient

dividend yield

next year's annual dividend/ today's stock price

real rate of return on a stock=

nominal rate of return- inflation rate

Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term while estimates using the historical geometric average will probably tend to _____ the expected return for the short-term

overestimate; underestimate

The primary purpose of Blume's formula is to

project future rates of return

portfolio will earn a rate of return similar to the average return on large-company stocks for 1926-2007.

rate of return 10-12.5%

The excess return is computed as the

return on a risky security minus the risk-free rate

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

small company stocks

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2007. Highest to lowest

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

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

small-company stocks

Which one of the following statements concerning US treasury bills is correct for the period 1926-2007

the annual rate of return was always positive

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

Which one of the following statements is correct?

the greater the volatility of returns, the greater the risk premium

efficient capital market

the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities

If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ___ form efficient so that you can have an advantage in the marketplace

weak