FIN 3060: Chapter 10

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:

strong form efficient

The period 1926-2011 illustrates that U.S. Treasury bills:

can either outperform or underperform inflation on an annual basis

What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?

2.5 percent

What was the average annual risk premium on small-company stocks for the period 1926-2011?

12.9 percent

Based on the period 1926-2011, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

Between 3 and 4 percent

The variance is the average squared difference between which of the following?

Actual return and average return

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

Available information

Geometric average:

Average compound return per period over multiple periods Answers the question: "What was your average compound return per year over a particular period?"

Which one of the following combinations will always result in an increased dividend yield?

Decrease in the stock price combined with a higher dividend amount

Which one of the following is the hypothesis that securities markets are efficient?

Efficient markets hypothesis

Risk premium:

Excess return on a risky asset over the risk-free rate, Reward for bearing risk

Defined as the average compound return earned per year over a multiyear period

Geometric average return

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

Which of the following has the narrowest distribution of returns for the period 1926-2011?

Intermediate-terms government bonds

When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?

NEVER

A bell-shaped frequency distribution that is defined by its average and standard deviation is called a:

Normal distribution

EMH (efficient market hypothesis)

On average, you will earn a return appropriate for the risk undertaken There is no bias in prices that can be exploited to earn excess returns Market efficiency will not protect you from wrong choices if you do not diversify You still don't want to put all your eggs in one basket

Risk-free rate:

Rate of return on a riskless investment, Treasury Bills are considered risk-free

Arithmetic average:

Return earned in an average period over multiple periods Answers the question: "What was your return in an average year over a particular period?"

Which best describes an arithmetic average return?

Return earned in an average year over a multiyear period

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?

Risk premium

Which one of the following is the positive square root of the variance?

Standard deviation

Which one of the following could cause the total return on investment to be a negative rate?

Stock price that declines over the investment period

The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the:

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:

Sum of the dividend yield and the capital gains yield is 8.2 percent

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

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

Which one of the following statements is correct?

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

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?

The price of New Labs stock increases rapidly to a higher price and then remains at that price

Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

The price of each security in that market will fluctuate

From 1926-2011, smallest risk premium?

U.S Treasury bills

Which one of the following statements is true regarding the period 1926-2011?

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

The rate of return on which of the following is used as the risk-free rate?

U.S. Treasury Bill

Which one of the following had the lowest standard deviation of returns for the period of 1926-2011?

U.S. Treasury Bill

The historical record for the period 1926-2011 shows that the annual nominal rate of return on:

U.S. Treasury Bills have had a positive rate of return for every year in every period

The standard deviation measures the ____ of a security's returns over time.

Volatility

According to the efficient markets hypothesis, professional investors will earn:

a dollar return equal to the value paid for an investment

Semistrong form market efficiency states that the value of a security is based on:

all publicly available information

Geometric average < arithmetic average unless:

all the returns are equal

Over the period of 1926-2011:

the risk premium on stocks exceeded the risk premium on bonds

Over the period 1926-2011:

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.

lower; lower

If the financial markets are semi-strong form efficient, then:

only individuals with private information have a marketplace advantage

Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns?

small-company stocks

Which one of the following categories has the widest frequency of distribution of returns for the period 1926-2011?

small-company stocks

Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2011?

small-company stocks

If the financial markets are efficient then:

stock prices should only respond to unexpected news and events

The average risk premium on long-term government bonds for the period 1926-2014 was equal to:

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