FIN 311 Chapter 12:

In an efficient market, firms should expect to receive ______ value for securities they sell. a) fair b) less than fair c) more than fair

a) fair

The Sharpe ratio measures ___. a) reward minus risk b) risk to reward c) reward to risk d) risk plus reward

c) reward to risk

The Ibbotson-Sinquefield data shows that ___. - long-term corporate bonds had less risk or variability than stocks - inflation was always higher than the U.S. T-bill yield - large-company stocks had higher returns than small-company stocks - U.S. T-bills had the lowest risk or variability

- long-term corporate bonds had less risk or variability than stocks - U.S. T-bills had the lowest risk or variability

More volatility in returns produces ______ difference between the arithmetic and geometric averages. a) a smaller b) no change in the c) a larger

c) a larger

Average returns can be calculated _____. a) only by the arithmetic average method b) only by the geometric average method c) two different ways

c) two different ways

Dividends are the ______ component of the total return from investing in a stock. a) amortization b) price appreciation c) capital gains d) income

d) income

The geometric average rate of return is approximately equal to ___. a) half the arithmetic mean minus half of the variance b) half of the arithmetic average plus half of the standard deviation c) the arithmetic mean plus half of the standard deviation d) the arithmetic mean minus half of the variance

d) the arithmetic mean minus half of the variance

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient. a) foreign b) newer c) monopolized d) well-organized

d) well-organized

Greater return volatility produces a ______ (smaller/larger) difference between the arithmetic and geometric averages.

larger

In an efficient market: - Assets are priced at the present value of their future cash flows - It is easy to find stocks that are under- or over-valued - All investments are zero NPV investments

- Assets are priced at the present value of their future cash flows - All investments are zero NPV investments Reason(s) why it's not the other options: - In efficient markets, it is not easy to find investments that are incorrectly valued, so NPV = 0

Which of the following are true? - T-bills occasionally show negative results - Common stocks may experience negative returns - T-bills sometimes outperform common stocks - On average, T-bills outperform common stocks

- Common stocks may experience negative returns - T-bills sometimes outperform common stocks Reason(s) why it's not the other options: - T-bills do not show negative returns, though the returns are sometimes lower than the inflation rate, resulting in a negative real return - On average, T-bills earn a much lower return that common stocks

Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums. Long-term corporate bonds Small-company common stock U.S. Treasury bills

1) Small-company common stock 2) Long-term corporate bonds 3) U.S. Treasury bills

The ______ ratio is calculated as the risk premium of the asset divided by the standard deviation.

Sharpe

Which of the following is commonly used to measure inflation? a) The Consumer Price Index (CPI) b) The Dow Jones Industrial Average (DJIA) c) The Case-Schiller Index (CSI) d) The CBOE Volatility Index (VIX)

a) The Consumer Price Index (CPI)

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______. a) beginning stock price b) ending stock price c) average of the beginning and ending stock prices

a) beginning stock price

A distribution tends to have a smooth shape when the number of observations is ___. a) very large b) about 100 or so c) about 30 or so d) very small

a) very large

A projected IRR on a risky investment in the _____ percent range is not unusual. a) 20 to 25 b) 10 to 20 c) 25 to 35

b) 10 to 20

When a company declares a dividend, shareholders generally receive ______. a) interest income b) cash c) store credit d) promissory notes

b) cash

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods. a) low; low b) high; high c) low; high d) high; low

d) high; low

Average returns can be calculated using ______ or arithmetic average.

geometric

The ______ (greater/lower) the risk, the greater the required return.

greater

The dividend ______ is defined as the annual dividend amount divided by the beginning stock price.

yield

The Ibbotson-Sinquefield data show that over the long-term, ___. - T-bills , which had the lowest risk, generated the lowest return - long-term corporate bonds had the lowest risk - small-company stocks had the highest risk level - large-company stocks generated the highest average return - small-company stocks generated the highest average return

- T-bills, which had the lowest risk, generated the lowest return - small-company stocks had the highest risk level - small-company generated the highest average return Reason(s) why it's not the other options: - The Ibbotson-Sinquefield data show that over the long-term, U.S. Treasury bonds had lower risk (and return) than long-term corporate bonds - The Ibbotson-Sinquefield data show that over the long-term, small-company stocks generated a higher return than large-company stocks

Studying market history can reward us by demonstrating that _____. - the stock market is nothing but a casino - the greater the potential reward is, the lower the risk - on average, investors will earn a reward for bearing risk - the greater the potential reward is, the greater the risk

- on average, investors will earn a reward for bearing risk - the greater the potential reward is, the greater the risk

Match the forms of market efficiency with their descriptions. Strong form efficiency Semistrong form efficiency Weak form efficiency It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices It is the most controversial, and all public information is reflected in the stock price It is implies that all information of every kind is reflected in stock prices

Strong form efficiency <------> It implies that all information of every kind is reflected in stock prices Semistrong form efficiency <------> It is the most controversial, and all public information is reflected in the stock price Weak form efficiency <------> It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices

Geometric averages are ______ arithmetic averages. a) smaller than b) larger than c) the same as

a) smaller than

The second lesson from studying capital market history is that risk is _____. a) to be avoided altogether b) handsomely rewarded c) always detrimental to returns d) largely ignored

b) handsomely rewarded

Normally, the excess rate of return on risky assets is ___. a) negative b) positive c) zero

b) positive Reason(s) why it's not the other options: Normally the excess rate of return is positive, because investors expect to be paid extra return for taking risk

The year 2008 was _______. a) one of the worst years for stock market investors in U.S. history b) an average year for the stock market c) one of the best years for stock market investors in U.S. history

a) one of the worst years for stock market investors in U.S. history

Variance is measured in ___, while standard deviation is measured in ___. a) percent squared; percent b) difference; square root c) percent; percent sqaured

a) percent squared; percent

The standard deviation is the ______ of the variance. a) square root b) square c) inverse d) exponent

a) square root

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient. a) True b) False

a) True Reason(s) why it's not the other options: Without such professional traders, prices would fail to reflect all relevant information

Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient. a) strong b) weak c) semistrong

a) strong Reason(s) why it's not the other options: b) In a weak form efficient market, only the information contained in past security prices is included in the current stock price. c) In a semistrong form efficient market, if investors don't expect the announcement in advance, the stock price will react after the announcement, because all public information is included in the stock price.

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using: a) the geometric average b) Blume's formula c) the arithmetic average

b) Blume's formula Reason(s) why it's not the other options: a) If you are forecasting for a very long period covering many decades, you should use geometric average. Blume's formula is more appropriate for a few decades. c) If you are forecasting a fairly short period (a decade or so), you should use arithmetic average. Blume's formula is more appropriate for a few decades.

Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return? a) Mona Corporation b) Scott Corporation

b) Scott Corporation Reason(s) why it's not the other options: The variance of return measures the squared difference in the returns from their mean

The ______ rate of return is the difference between risky returns and risk-free returns. a) excess b) subluminal c) nominal d) real

a) excess Reason(s) why it's not the other options: c) The nominal rate is the real rate combined with the inflation rate d) The real rate is the nominal rate adjusted for inflation

An efficient market is one in which any change in available information will be reflected in the company's stock price ___. a) immediately b) in tow days c) in a day d) at least within a week

a) immediately

An efficient market is one that fully reflects all available ______. a) information b) investments c) inefficiencies d) redundancies

a) information