ch. twelve: concept questions

Which one of the following earned the highest risk premium over the period 1926-2010? -long-term corporate bonds -U.S. Treasury bills -small-company stocks -large-company stocks -long-term government bonds

-small-company stocks

Which one of the following is most indicative of a totally efficient stock market? -extraordinary returns earned on a routine basis -positive net present values on stock investments over the long-term -zero net present values for all stock investments -arbitrage opportunities which develop on a routine basis -realizing negative returns on a routine basis

-zero net present values for all stock investments

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010? -long-term government bonds -small company stocks -large company stocks -long-term corporate bonds -U.S. Treasury bills

US treasury bills

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. -weak -semiweak -semistrong -strong -perfect

semistrong

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010? -long-term corporate bonds -large-company stocks -intermediate-term government bonds -U.S. Treasury bills -small-company stocks

small company stocks

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. -weak -semiweak -semistrong -strong -perfect

strong

Inside information has the least value when financial markets are: -weak form efficient. -semiweak form efficient. -semistrong form efficient. -strong form efficient. -inefficient.

strong form efficient

Standard deviation is a measure of which one of the following? -average rate of return -volatility -probability -risk premium -real returns

volatility

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 -semiweak -semistrong -strong -perfect

weak

Which of the following correspond to a wide frequency distribution?I. relatively low riskII. relatively low rate of returnIII. relatively high standard deviationIV. relatively large risk premium -II only -III only -I and II only -II and III only -III and IV only

-III and IV only

Which of the following statements is correct in relation to a stock investment?I. The capital gains yield can be positive, negative, or zero.II. The dividend yield can be positive, negative, or zero.III. The total return can be positive, negative, or zero.IV. Neither the dividend yield nor the total return can be negative. I only I and II only I and III only I and IV only IV only

I and III

Which one of the following statements best defines the efficient market hypothesis? -Efficient markets limit competition. -Security prices in efficient markets remain steady as new information becomes available. -Mispriced securities are common in efficient markets. -All securities in an efficient market are zero net present value investments. -Profits are removed as a market incentive when markets become efficient.

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

Which one of the following statements related to capital gains is correct? -The capital gains yield includes only realized capital gains. -An increase in an unrealized capital gain will increase the capital gains yield. -The capital gains yield must be either positive or equal to zero. -The capital gains yield is expressed as a percentage of the sales price. -The capital gains yield represents the total return earned by an investor.

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

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?I. insiders knew the information prior to the announcementII. investors need time to digest the information prior to reactingIII. the information has no bearing on the value of the firmIV. the information was anticipated -I and II only -I and III only -II and III only -II and IV only -III and IV only

-III and IV only

Which one of the following statements is correct? -The greater the volatility of returns, the greater the risk premium. -The lower the volatility of returns, the greater the risk premium. -The lower the average return, the greater the risk premium. -The risk premium is unrelated to the average rate of return. -The risk premium is not affected by the volatility of returns.

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

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

-increase the risk premium.

According to theory, studying historical stock price movements to identify mispriced stocks: -is effective as long as the market is only semistrong form efficient. -is effective provided the market is only weak form efficient. -is ineffective even when the market is only weak form efficient. -becomes ineffective as soon as the market gains semistrong form efficiency. -is ineffective only in strong form efficient markets.

-is ineffective even when the market is only weak form efficient.

Individuals who continually monitor the financial markets seeking mispriced securities: -earn excess profits over the long-term. -make the markets increasingly more efficient. -are never able to find a security that is temporarily mispriced. -are overwhelmingly successful in earning abnormal profits. -are always quite successful using only historical price information as their basis of evaluation.

-make the markets increasingly more efficient.

Which one of the following correctly describes the dividend yield? -next year's annual dividend divided by today's stock price -this year's annual dividend divided by today's stock price -this year's annual dividend divided by next year's expected stock price -next year's annual dividend divided by this year's annual dividend -the increase in next year's dividend over this year's dividend divided by this year's dividend

-next year's annual dividend divided by today's stock price

The excess return is computed as the: -return on a security minus the inflation rate. -return on a risky security minus the risk-free rate. -risk premium on a risky security minus the risk-free rate. -the risk-free rate plus the inflation rate. -risk-free rate minus the inflation rate.

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

Efficient financial markets fluctuate continuously because: -the markets are continually reacting to old information as that information is absorbed. -the markets are continually reacting to new information. -arbitrage trading is limited. -current trading systems require human intervention. -investments produce varying levels of net present values.

-the markets are continually reacting to new information.

Which of the following statements related to market efficiency tend to be supported by current evidence?I. Markets tend to respond quickly to new information.II. It is difficult for investors to earn abnormal returns.III. Short-run prices are difficult to predict accurately based on public information.IV. Markets are most likely weak form efficient. -I and III only -II and IV only -I and IV only -I, III, and IV only -I, II, and III only

I, II, III only

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? -riskless market -evenly distributed market -zero volatility market -Blume's market -efficient capital market

efficient capital market