Chapter 12

Electronics, Inc. common stock returned a nifty 23.5 percent rate of return last year. Thedividend amount was $0.25 a share which equated to a dividend yield of 0.95 percent.What was the rate of price appreciation for the year? a. 22.55% b. 23.38% c. 23.60% d. 23.87% e. 23.52%

a. 22.55%

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5percent over the past six years. What is the geometric average return for this time period? a. 4.26 percent b. 4.67 percent c. 5.13 percent d. 5.39 percent e. 5.60 percent

a. 4.26 percent

One year ago, you purchased a stock at a price of $47.50 a share. Today, you sold the stock and realized a total loss of 22.11 percent. Your capital gain was -$12.70 a share.What was your dividend yield?a. 4.63 percent b. 4.88 percent c. 5.02 percent d. 12.67 percent e. 14.38 percent

a. 4.63 percent

The return earned in an average year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant d. geometric e. real

a. arithmetic

Which one of the following correctly describes the dividend yield? a. next year's annual dividend divided by today's stock price b. this year's annual dividend divided by today's stock price c. this year's annual dividend divided by next year's expected stock priced. next year's annual dividend divided by this year's annual dividend e. the increase in next year's dividend over this year's dividend divided by this year's dividend

a. next year's annual dividend divided by today's stock price

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? a. risk premium b. geometric return c. arithmetic d. standard deviation e. variance

a. risk premium

Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70a share. The stock pays a quarterly dividend of $0.15 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? a. $15 b. $30 c. $45 d. $50 e. $60

b. $30

Four months ago, you purchased 1,500 shares of Lakeside Bank stock for $11.20 a share.You have received dividend payments equal to $0.25 a share. Today, you sold all of your shares for $8.60 a share. What is your total dollar return on this investment? a. -$3,900 b. -$3,525 c. -$3,150 d. -$2,950 e. -$2,875

b. -$3,525

One year ago, you purchased a stock at a price of $33.49. The stock pays quarterly dividends of $0.20 per share. Today, the stock is selling for $28.20 per share. What is your capital gain on this investment?a. -$5.49 b. -$5.29 c. -$4.76 d. -$4.16 e. -$5.09

b. -$5.29

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -12 percent, 16 percent, 22 percent, and 18 percent. What is the variance of these returns? a. 0.02070 b. 0.01972 c. 0.01725 d. 0.01684 e. 0.02633

b. 0.01972

You own 400 shares of Western Feed Mills stock valued at $51.20 per share. What is the dividend yield if your annual dividend income is $352? a. 1.68 percent b. 1.72 percent c. 1.83 percent d. 1.13 percent e. 1.21 percent

b. 1.72 percent

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 3 percent, -10 percent, 24 percent, 22 percent, and 12 percent. Suppose the average inflation rate over this time period was 3.6 percent and the average T-bill rate was 4.8 percent. Based on this information, what was the average nominal risk premium? a. 5.15 percent b. 5.40 percent c. 6.01 percent d. 6.37 percent e. 6.60 percent

b. 5.40 percent

Last year, you purchased a stock at a price of $47.10 a share. Over the course of the year, you received $2.40 per share in dividends while inflation averaged 3.4 percent. Today, you sold your shares for $49.50 a share. What is your approximate real rate of return on this investment? a. 6.30 percent b. 6.79 percent c. 7.18 percent d. 9.69 percent e. 10.19 percent

b. 6.79 percent

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

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

Assume that you invest in a portfolio of large-company stocks. Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010. What rate of return should you expect to earn? a. less than 10 percent b. between 10 and 12.5 percent c. between 12.5 and 15 percent d. between 15 and 17.5 percent e. more than 17.5 percent

b. between 10 and 12.5 percent

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

b. increase the risk premium.

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 and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. a. overestimate; overestimate b. overestimate; underestimate c. underestimate; overestimated. underestimate; underestimate e. accurately; accurately

b. overestimate; underestimate

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

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

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

b. the markets are continually reacting to new information.

Standard deviation is a measure of which one of the following? a. average rate of return b. volatility c. probability d. risk premium e. real returns

b. volatility

You just sold 600 shares of Wesley, Inc. stock at a price of $32.04 a share. Last year, you paid $30.92 a share to buy this stock. Over the course of the year, you received dividends totaling $1.20 per share. What is your total capital gain on this investment? a. -$618 b. -$672 c. $672 d. $618 e. $720

c. $672

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. a. I only b. I and II only c. I and III only d. I and IV only e. IV only

c. I and III only

As long as the inflation rate is positive, the real rate of return on a security will be ____the nominal rate of return. a. greater than b. equal to c. less than d. greater than or equal to e. unrelated to

c. less than

The real rate of return on a stock is approximately equal to the nominal rate of return: a. multiplied by (1 + inflation rate). b. plus the inflation rate. c. minus the inflation rate. d. divided by (1 + inflation rate). e. divided by (1 - inflation rate).

c. minus the inflation rate.d. divided by (1 + inflation rate).

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. a. weak b. semi weak c. semi strong d. strong e. perfect

c. semistrong

Which one of the following categories of securities had the highest average return for the period 1926-2010? a. U.S. Treasury bills b. large company stocks c. small company stocks d. long-term corporate bonds e. long-term government bonds

c. small company stocks

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest. a. large company stocks, U.S. Treasury bills, long-term government bonds b. small company stocks, long-term corporate bonds, large company stocks c. small company stocks, long-term corporate bonds, intermediate-term government bonds d. large company stocks, small company stocks, long-term government bonds e. intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

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

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

c. small-company stocks

A stock had returns of 11 percent, -18 percent, -21 percent, 20 percent, and 34 percent over the past five years. What is the standard deviation of these returns? a. 18.74 percent b. 20.21 percent c. 20.68 percent d. 24.01 percent e. 23.49 percent

d. 24.01 percent

You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16percent for four of the last five years. The average return of the stock for the 5-year period was 13 percent. What is the standard deviation of the stock's returns for the five-year period? a. 21.39 percent b. 24.98 percent c. 27.16 percent d. 31.23 percent e. 34.02 percent

d. 31.23 percent

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

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

What was the highest annual rate of inflation during the period 1926-2010? a. between 0 and 3 percent b. between 3 and 5 percent c. between 5 and 10 percent d. between 10 and 15 percent e. between 15 and 20 percent

d. between 10 and 15 percent e. between 15 and 20 percent

What was the average rate of inflation over the period of 1926-2010?a. less than 2.0 percent b. between 2.0 and 2.5 percent c. between 2.5 and 3.0 percent d. between 3.0 and 3.5 percent e. greater than 3.5 percent

d. between 3.0 and 3.5 percent

The average compound return earned per year over a multi-year period is called the_____ average return. a. arithmetic b. standard c. variant d. geometric e. real

d. geometric

Calculate the standard deviation of the following rates of return: Year- 1, 2, 3, 4, 5 Return- 7%, 25%, 14%, -15%, 16% a. 10.79 percent b. 12.60 percent c. 13.48 percent d. 14.42 percent e. 15.08 percent

e. 15.08 percent

Great Lakes Health Care common stock offers an expected total return of 9.2 percent.The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield? a. 3.75% b. 4.20% c. 4.55% d. 5.25% e. 6.60%

e. 6.60%

One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of $9.75 a share. The company pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $15.60 a share. What is your total percentage return on this investment? a. 38.46 percent b. 39.10 percent c. 39.72 percent d. 62.50 percent e. 61.03 percent

e. 61.03 percent

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. a. I and III only b. II and IV only c. I and IV only d. I, III, and IV only e. I, II, and III only

e. I, II, and III only

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 announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated a. I and II only b. I and III only c. II and III only d. II and IV only e. III and IV only

e. III and IV only

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

e. U.S. Treasury bills

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

e. small-company stocks