intro to finance chapter 12 questions

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

16 percent

One year ago, you purchased a stock at a price of $32.15. The stock pays quarterly dividends of $.20 per share. Today, the stock is selling for $33.09 per share. What is your capital gain on this investment?

$.94 Capital gain = $33.09-32.15 = $.94

A stock had returns of 6 percent, -22 percent, 18percent, 12 percent, and -2 percent over the past five years. What is the standard deviation of these returns?

15.52 percent Average return = (.06 - .22 + .18 + .12- .02)/5 = .024 σ = √[1/(5 - 1)] [(.06 - .024)2 + (-.22 - .024)2 + (.18 -.024)2 + (.12 - .024)2 + (-.02 - .024)2] = .1552, or 15.52 percent

What was the highest annual rate of inflation during the period 1926-2013?

Between 15 and 20 percent

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 average compound return earned per year over a multiyear period is called the _____ average return.

geometric

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.

semi strong

One year ago, you purchased 100 shares of Best Wings stock at a price of $49.65 a share. The company pays an annual dividend of $.64 per share. Today, you sold for the shares for $43.30 a share. What is your total percentage return on this investment?

-11.50 percent

The common stock of Air United had annual returns of 13.7 percent, 4.8 percent, -6.7 percent, and 27.9 percent over the last four years, respectively. What is the standard deviation of these returns?

14.61 percent Average return = (.137 + .048 - .067 + .279)/4 = .09925, or 9.925 percent σ = √[1/(4 - 1)] [(.137 - .09925)2 + (.048 - .09925)2 + (-.067 - .09925)2 + (.279 - .09925)2] = .1461, or 14.61 percent

To convince investors to accept greater volatility, you must:

Increase the risk premium.

Which one of the following statements best defines the efficient market hypothesis?

all securities in an efficient market are zero net present value investments

West Wind Tours stock is currently selling for $48 a share. The stock has a dividend yield of 3.2 percent. How much dividend income will you receive per year if you purchase 200 shares of this stock?

$307.20 Dividend income = $48 �.032 �200 = $307.20

One year ago, you purchased 400 shares of SL Industries stock at a price of $26.15a share. The stock pays an annual dividend of $1.34 per share. Today, you sold all of your shares for $28.20 per share. What is your total dollar return on this investment?

1,356 Total dollar return = ($28.20 - 26.15 + 1.34) �400 = $1,356

You own 1,200 shares of Western Feed Mills stock valued at $46.80 per share. What is the dividend yield if your annual dividend income is $1,644?

2.93 percent Dividend yield = ($1,644/1,200)/$46.80 = .0293, or 2.93 percent

Which one of the following time periods is associated with low rates of inflation?

2010-2013

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. Average return = (.04 + .11 + .16 - .06 - .02)/5 = .046, or 4.6 percent σ = √[1/(5 - 1)] [(.04 - .046)2 + (.11 -.046)2 + (.16 - .046)2 + (-.06 -0.046)2 + (-.02 -.046)2] = .0904, or 9.04 percent Upper end of 68 percent range = .046 + (1 ×.0904) = .1364, or 13.64 percent Upper end of 95 percent range = .046 - (2 × .0904) = .2268, or 22.68 percent Probability of earning at least 20 percent in any one year is greater than 2.5 percent but less than 16 percent. 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. Average return = (.11 + .14 + .04 - .09 + .05)/5 = .05, or 5 percent σ = √[1/(5 - 1)][(.11 - .05)2 + (.14 - .05)2 + (.04 - .05)2 + (-.09 - .05)2 + (.05 - .05)2] = .0886, or 8.86 percent Lower bound of 68% probability range = .05 - (1 ×.0886) = -.0386, or -3.86 percent Lower bound of 95% probability range = .05 - (2 ×.0886) = -.1272, or -12.72 percent The probability of losing 10 percent or more is greater than 2.5 percent but less than 16 percent. Thus, the probability of NOT losing more than 10 percent is greater than 84 percent but less than 97.5 percent.

Which one of the following statements is correct based on the historical record for the period 1926-2013?

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

The return earned in an average year over a multiyear period is called the _____ average return

arithmetic

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

Based on the period 1926-2013, the actual real return on large-company stocks has been around:

8.8 percent

Christina purchased 200 shares of stock at a price of $62.30 a share and sold them for $70.25 a share. She also received $148 in dividends. If the inflation rate was 4.2 percent, What was her approximate real rate of return on this investment?

9.75 percent Nominal return = [$70.25 - 62.30 + ($148 /200)]/$62.30 = .1395, or 13.95 percent Approximate real return = 13.95 percent - 4.2 percent = 9.75 percent

Which one of the following statements is correct concerning market efficiency?

A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.

capital gains

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

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?

Average return = (.16 + .08 - .17 + .21)/4 =.07, or 7 percent σ = [1/ (4 - 1)][(.16 -.07)2 +(.08 -.07)2+ (-.17 -.07)2+ (.21 -.07)2].5= .1687, or 16.87 percent 95% probability range = .07 ± (2 ×16.87 percent) = -26.74 to 40.74 percent

Generally speaking, which of the following most 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

High standard deviation, large risk premium

Risk Premium

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?

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2013? Rank from highest to lowest.

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

Individual investors who continually monitor the financial markets seeking mispriced securities:

Make the markets increasingly more efficient.

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Markets tend to respond quickly to new information.

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price.

Estimates of the rate of return on a security based on the 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

Which one of the following categories of securities had the highest average return for the period 1926-2013?

Small company stocks

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013?

Small-company stocks

Inside information has the least value when financial markets are:

Strong form efficient.

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2013?

The annual rate of return was always positive.

Which one of the following best defines the variance of an investment's annual returns over a number of years?

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

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $.75 in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

Efficient financial markets fluctuate continuously because:

The markets are continually reacting to new information.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013?

U.S. Treasury bills

Which one of the following had the least volatile annual returns over the period of 1926-2013?

U.S. Treasury bills

Which one of the following statements correctly applies to the period 1926-2013?

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

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2013?

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

which of the following yields on a stock can be negative

capital gains yield and total return

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

efficicient capital market

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semi strong form efficient.

info was expected

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

less than

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

normal rate of return minus the inflation rate

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

Standard deviation is a measure of

volatility

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

weak