Chapter 12.1- 12.5

37. What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A. 1.0 percent B. 2.5 percent C. 5.0 percent D. 16 percent E. 32 percent

16 percent

22. Which one of the following time periods is associated with high rates of inflation? A. 1929-1933 B. 1957-1961 C. 1978-1981 D. 1992-1996 E. 2001-2005

1978-1981

30. 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. A. 3 B. 5 C. 7 D. 9 E. 11

5

38. According to Jeremy Siegel, the real return on stocks over the long-term has averaged about: A. 6.8 percent B. 8.7 percent C. 10.4 percent D. 12.3 percent E. 14.8 percent

6.8 percent

12. 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.

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

13. 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

I and III only

35. 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? I. decrease in the average rate of return II. increase in the risk premium III. increase in the 68 percent probability range of the frequency distribution of returns IV. decrease in the standard deviation A. I only B. IV only C. II and III only D. I and III only E. II and IV only

II and III only

33. Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium A. II only B. III only C. I and II only D. II and III only E. III and IV only

III and IV only

40. Which of the following statements are true based on the historical record for 1926-2007? I. Risk and potential reward are inversely related. II. Risk-free securities produce a positive real rate of return each year. III. Returns are more predictable over the short-term than they are over the long-term. IV. Bonds are generally a safer investment than are stocks. A. I only B. IV only C. II and III only D. II and IV only E. II, III, and IV only

IV only

39. The historical record for the period 1926-2007 supports which one of the following statements? A. A higher-risk security will provide a higher rate of return next year than will a lower-risk security. B. If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. C. Increased long-run potential returns are obtained by lowering risks. D. It is possible for small-company stocks to more than double in value in any one given year. E. Inflation was positive each year throughout the period of 1926-2007.

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

36. Which one of the following statements is correct based on the historical record for the period 1926-2007? A. The standard deviation of returns for small-company stocks was double that of large-company stocks. B. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. C. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. D. Inflation was less volatile than the returns on U.S. Treasury bills. E. Long-term government bonds underperformed intermediate-term government bonds.

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

23. Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2007? A. The annual rate of return always exceeded the annual inflation rate. B. The average risk premium was 0.7 percent. C. The annual rate of return was always positive. D. The average excess return was 1.1 percent. E. The average real rate of return was zero.

The annual rate of return was always positive

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

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

9. Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment? A. The dividend yield is expressed as a percentage of the selling price. B. The capital gain would have been less had Stacy not received the dividends. C. The total dollar return per share is $3. D. The capital gains yield is positive. E. The dividend yield is greater than the capital gains yield.

The capital gains yield is positive.

32. Which one of the following statements is correct? A. The greater the volatility of returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The lower the average return, the greater the risk premium. D. The risk premium is unrelated to the average rate of return. E. The risk premium is not affected by the volatility of returns.

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

19. Which one of the following categories of securities had the lowest average risk premium for the period 1926-2007? A. long-term government bonds B. small company stocks C. large company stocks D. long-term corporate bonds E. U.S. Treasury bills

U.S. Treasury bills

31. Which one of the following was the least volatile over the period of 1926-2007? A. large-company stocks B. inflation C. long-term corporate bonds D. U.S. Treasury bills E. intermediate-term government bonds

U.S. Treasury bills

21. Which one of the following statements correctly applies to the period 1926-2007? A. Large-company stocks earned a higher average risk premium than did small-company stocks. B. Intermediate-term government bonds had a higher average return than long-term corporate bonds. C. Large-company stocks had an average annual return of 14.7 percent. D. Inflation averaged 2.6 percent for the period. E. U.S. Treasury bills had a positive average real rate of return.

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

17. Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2007? A. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period. B. U.S. Treasury bills provided a positive rate of return each and every year during the period. C. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. D. Long-term government bonds outperformed U.S. Treasury bills every year during the period. E. National deflation occurred at least once every decade during the period.

U.S. Treasury bills provided a positive rate of return each and every year during the period.

6. 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

arithmetic

29. 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 1926-2007. 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

between 10 and 12.5 percent

25. What was the highest annual rate of inflation during the period 1926-2007? 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

between 10 and 15 percent

28. What was the average rate of inflation over the period of 1926-2007? 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

between 3.0 and 3.5 percent

11. Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: A. was unaffected by the announcement. B. increased proportionately with the dividend decrease. C. decreased proportionately with the dividend decrease. D. decreased by $0.14 per share. E. increased by $0.14 per share.

decreased proportionately with the dividend decrease.

5. 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

geometric

34. 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.

increase the risk premium.

15. 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

less than

14. 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).

minus the inflation rate.

10. 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 price D. 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

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

4. Which one of the following is defined by its mean and its standard deviation? A. arithmetic nominal return B. geometric real return C. normal distribution D. variance E. risk premium

normal distribution

41. 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. A. overestimate; overestimate B. overestimate; underestimate C. underestimate; overestimate D. underestimate; underestimate E. accurately; accurately

overestimate; underestimate

42. The primary purpose of Blume's formula is to: A. compute an accurate historical rate of return. B. determine a stock's true current value. C. consider compounding when estimating a rate of return. D. determine the actual real rate of return. E. project future rates of return.

project future rates of return.

26. 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.

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

1. 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

risk premium

18. Which one of the following categories of securities had the highest average return for the period 1926-2007? A. U.S. Treasury bills B. large company stocks C. small company stocks D. long-term corporate bonds E. long-term government bonds

small company stocks

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

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

20. Which one of the following categories of securities has had the most volatile returns over the period 1926-2007? A. long-term corporate bonds B. large-company stocks C. intermediate-term government bonds D. U.S. Treasury bills E. small-company stocks

small-company stocks

27. Which one of the following earned the highest risk premium over the period 1926-2007? A. long-term corporate bonds B. U.S. Treasury bills C. small-company stocks D. large-company stocks E. long-term government bonds

small-company stocks

16. Small-company stocks, as the term is used in the textbook, are best defined as the: A. 500 newest corporations in the U.S. B. firms whose stock trades OTC. C. smallest twenty percent of the firms listed on the NYSE. D. smallest twenty-five percent of the firms listed on NASDAQ. E. firms whose stock is listed on NASDAQ.

smallest twenty percent of the firms listed on the NYSE.

3. 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

volatility