FIN chpt.12 math

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following to occur as a result?

Decrease in the 68 percent probability range of returns

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that:

Either stock A is overpriced or stock B is underpriced or both.

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? - Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. - The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. - Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. - The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. - Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

A stock had returns of 4 percent, 11 percent, 16 percent, -6 percent, and -2 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year?

Greater than 2.5 percent but less than 16 percent.

Aimee is the owner of a stock with annual returns of 27 percent, -32 percent, 11 percent, and 23 percent for the past four years. She thinks the stock may be able to achieve a return of 50 percent or more in a single year. What is the probability that your friend is correct?

Greater than 2.5 percent but less than 16 percent.

Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Greater than 84 percent but less than 97.5 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

I, II, and III only

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

III and IV only

Which of the following statements are true based on the historical record for 1926-2010? 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.

IV only

A stock had annual returns of 4.8 percent, -11.6 percent, 18.2 percent, and 7.4 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 30percent or more in a single year?

Less than 2.5 percent but more than .5 percent

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? - The dividend yield is expressed as a percentage of the selling price. - The capital gain would have been less had Stacy not received the dividends. - The total dollar return per share is $3. - The capital gains yield is positive.

The capital gains yield is positive.

Which one of the following statements related to unexpected returns is correct? - All announcements by a firm affect that firm's unexpected returns. Unexpected returns over time have a negative effect on the total return of a firm. - Unexpected returns are relatively predictable in the short-term. - Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. - Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

The systematic risk of the market is measured by:

a beta of 1.0.

Which one of the following is the best example of a diversifiable risk?

a firm's sales decrease

The expected return on a stock computed using economic probabilities is:

a mathematical expectation based on a weighted average and not an actual anticipated outcome.

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:

decreased proportionately with the dividend decrease.

To convince investors to accept greater volatility, you must:

increase the risk premium.

According to theory, studying historical stock price movements to identify mispriced stocks

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

Which one of the following is represented by the slope of the security market line?

market risk premium

The real rate of return on a stock is approximately equal to the nominal rate of return:

minus the inflation rate.

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.

overestimate; underestimate

Unsystematic risk can be effectively eliminated by________________

portfolio diversification.

The excess return is computed as the:

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

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?

risk premium

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.

semistrong

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.

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? - long-term corporate bonds - U.S. Treasury bills - small-company stocks - large-company stocks - long-term government bonds

small-company stocks

Small-company stocks, as the term is used in the textbook, are best defined as the:

smallest twenty percent of the firms listed on the NYSE.

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.

strong

The market risk premium is computed by:

subtracting the risk-free rate of return from the market rate of return

Which one of the following is a risk that applies to most securities? unsystematic diversifiable systematic asset-specific total

systematic

Standard deviation is a measure of which one of the following? 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

A stock had annual returns of 16 percent, 8 percent, -17 percent, and 21 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

-26.74 to 40.74percent

A stock has an expected rate of return of 13 percent and a standard deviation of 21 percent. Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year?

.5 percent

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

0.00 percent

A stock has an expected return of 11 percent, the risk-free rate is 5.2 percent, and the market risk premium is 5 percent. What is the stock's beta?

1.16

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

10

You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16 percent for four of the last five years. The average return of the stock for the past year-year period was 8 percent. What is the standard deviation of the stock's returns for the 5-year period?

21.22 percent

Which one of the following statements is correct concerning market efficiency? - Real asset markets are more efficient than financial markets. - If a market is efficient, arbitrage opportunities should be common. - In an efficient market, some market participants will have an advantage over others. - A firm will generally receive a fair price when it issues new shares of stock. - New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.

A firm will generally receive a fair price when it issues new shares of stock.

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