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CH12 - test
Introduction to Finance (Harvard University)
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TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1)
Investors shouldn't count capital gains as part of total returns until the security is sold, since the
capital gain is really only a "paper gain" up to that point.
Answer:
2)
False
True
False
True
False
True
False
On the basis of historical data from the 1957-2005 period, the return on the average Treasury bill
has fluctuated more than the return on the average long bond.
Answer:
9)
True
With a mean of 5% and a standard deviation of 10%, the probability of earning more than 25% in
any one year is no more than 2.5%.
Answer:
8)
False
The mean is equal to the average variance of an investment over a period of time.
Answer:
7)
True
If the lowest return for a 68% probability range is -21%, then there is a 32% chance that the loss in
any one year will be greater than 21%.
Answer:
6)
False
The 99% probability range is equal to the mean plus or minus three times the variance.
Answer:
5)
True
A growth stock is a stock that results in a high return with relatively low levels of risk.
Answer:
4)
False
The total return on a security is made up of two components: the capital gains component and the
price appreciation component.
Answer:
3)
True
True
False
Stocks of small companies have higher average returns than those of larger companies.
Answer:
True
10) Risky securities
Answer:
True
11) Long bonds
Answer:
False
have higher average returns than riskless securities.
False
have higher average yields than Treasury bills.
True
False
12) Historical
information about capital markets is useful for drawing conclusions about the relationship
between risk and return.
Answer:
13) Canadian
Answer:
True
False
common stocks have grown faster than the rate of inflation over the period 1957-2005.
True
False
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14) Treasury bills
Answer:
15) Small
have grown faster than the rate of inflation over the period 1957-2005.
True
False
stocks have grown faster than the rate of inflation over the period 1957-2005.
Answer:
True
False
16) On
the basis of historical data from the 1948-2002 period, the return on the average common stock
has fluctuated less than the return on the average stock of small firms.
Answer:
17) In
True
False
general, the longer the term of an investment the lower the risk premium will be.
Answer:
True
False
18) Small-company stocks
Answer:
True
19) The risk-free
Answer:
20) To
offer a higher return and less risk than large-company stocks.
False
rate of return is based on the long-term government bond rate.
True
False
accept higher levels of risk, investors must be paid a higher risk premium.
Answer:
True
21) The standard
Answer:
deviation can be negative, positive, or equal to zero.
True
22) The greater the
Answer:
23) The lower
True
True
24) The standard
Answer:
Answer:
26) The higher
Answer:
27) The higher
Answer:
standard deviation, the lower the risk.
False
False
deviation measures the volatility of a security's returns.
True
25) The standard
28) The larger
False
the standard deviation, the lower the level of risk.
Answer:
Answer:
False
False
deviation is a measure of volatility.
True
False
the standard deviation, the less certain the rate of return in any one given year.
True
False
the standard deviation, the higher the expected return.
True
False
the variance, the more the actual returns tend to differ from the average return.
True
False
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29) The larger
Answer:
30) The larger
Answer:
31) The larger
Answer:
32) The higher
Answer:
the variance, the larger the standard deviation.
True
False
the variance, the greater the risk of the investment.
True
False
the variance, the higher the expected return.
True
False
the standard deviation, the less predictable the rate of return in any one year.
True
False
33) The 95% probability range
Answer:
True
is equal to the mean plus or minus three standard deviations.
False
34) According to
theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are semi-strong-form efficient.
Answer:
True
False
35) According to
theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are strong-form efficient.
Answer:
36) In
True
False
efficient markets, investments have an expected risk premium equal to zero.
Answer:
38) A
False
efficient markets, investments have an expected return equal to zero.
Answer:
37) In
True
True
False
strong form of market efficiency is considered to hold in well-organized markets.
Answer:
True
39) The lessons
Answer:
from capital market history tell us that the TSX is an inefficient market.
True
40) Generally speaking,
Answer:
False
True
False
financial markets are less efficient than real asset markets.
False
41) Your
classmate just made $10,000 in a single day by trading in the stock market. It is reasonable to
conclude, therefore, that the efficient market hypothesis cannot be true.
Answer:
True
False
42) On
most days, you notice that stock prices fluctuate wildly. It is obvious to you that markets are
inefficient during this period.
Answer:
True
False
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43) Capital
market efficiency is attributable largely to the lack of competition among market
participants for information.
Answer:
True
44) Information
efficient.
Answer:
False
spreading rapidly in today's world reinforces the argument that the financial markets are
True
False
45) The tremendous
competition in the financial markets reinforces the argument that the financial
markets are efficient.
Answer:
46) Market
Answer:
True
False
prices continually fluctuating reinforces the argument that the financial markets are efficient.
True
False
47) Market
prices reacting suddenly to unexpected news announcements reinforces the argument that
the financial markets are efficient.
Answer:
True
False
48) According to
theory, studying historical prices in order to identify mispriced stocks will not work in
markets that are weak-form efficient.
Answer:
49) In
True
False
semi-strong form efficiency of market efficiency is considered to hold in well-organized markets.
Answer:
51) A
False
efficient markets, investments have an expected NPV equal to zero.
Answer:
50) A
True
True
False
weak form efficiency of market efficiency is considered to hold in well-organized markets.
Answer:
True
52) The lessons
Answer:
False
from capital market history tell us that there is a reward for bearing risk.
True
False
53) The lessons
from capital market history tell us that the greater the potential reward from a risky
asset, the greater is the risk.
Answer:
True
False
54) If
insiders were allowed to profit on their inside information without penalty, financial markets
would be less efficient.
Answer:
55) If
True
False
a market has semi-strong efficiency, then all insider information is included in market prices.
Answer:
True
False
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56) If
a market has semi-strong efficiency, then all information of any kind is included in market prices.
Answer:
57) If
False
a market has semi-strong efficiency, then all historical information is included in market prices.
Answer:
58) If
True
True
False
a market has semi-strong efficiency, then all public information is included in market prices.
Answer:
True
False
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
59) Seven
months ago, you purchased 300 shares of Stadford, Inc. stock at a price of $48.30 a share.
The company pays quarterly dividends of $.40 a share. Today, you sold all of your shares for $45.20
a share. What is your total percentage return on this investment?
A) - 4.8%
B) - 6.4%
C) - 3.1%
D) 8.1%
E) 9.7%
Answer: A
60) You
purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for
$21 each. At that end of the year, a $1.50 per share dividend was paid.
What is the total dollar return for the investment?
A) $1,750
B) $1,500
C) $1,250
D) $750
E) $0
Answer: E
61) You
purchased 200 shares of preferred stock on January 1, 2002 for $42.27 per share. The stock
pays an annual dividend of $7 per share. On December 31, 2002 the market price is $46.88 per
share. What is your total dollar return for the year?
A) $2,322
B) $478
C) $1,400
D) $2,678
E) $922
Answer: A
62) Six
months ago, you purchased 1,300 shares of New Tech stock for $12.70 a share. You have
received dividend payments equal to $.05 a share. Today, you sold all of your shares for $14.20 a
share. What is your total dollar return on this investment?
A) $1,025
B) $1,950
C) $2,015
D) $650
E) $1,885
Answer: C
63) One
year ago, you purchased a stock at a price of $28.75. The stock pays quarterly dividends of $.35
per share. Today, the stock is worth $31.25 per share. What is the total amount of your capital gains
to date from this investment?
A) $0.70
B) $3.90
C) $1.40
D) $2.50
E) $1.10
Answer: D
64) Analog,
Inc. stock is currently selling for $16.92 a share. The stock has a dividend yield of 1.3%.
How much dividend income will you receive per year if you purchase 600 shares of this stock?
A) $128.03
B) $129.11
C) $131.98
D) $127.46
E) $124.50
Answer: C
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65) One
year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40
per share. Today, the stock is worth $34.60 per share. What is the total amount of your dividend
income to date from this investment?
A) $.40
B) $3.70
C) $2.50
D) $1.60
E) $2.10
Answer: D
66) A
year ago, you purchased 200 shares of Holland Enterprises, Inc. stock at a price of $15.54 per
share. The stock pays an annual dividend of $.20 per share. Today, you sold all of your shares for
$17.70 per share. What is your total dollar return on this investment?
A) $472
B) $432
C) $216
D) $140
E) $160
Answer: A
67) Eight
months ago, Turner purchased 100 shares of Delta Frames stock at a price of $47.08 a share.
Delta pays a quarterly dividend of $1.10 a share. Today, Turner sold all of his shares for $48.63 per
share. What is Turner's total capital gain on this investment?
A) $360
B) $265
C) $180
D) $155
E) $375
Answer: D
68) You
just sold 200 shares of Langley, Inc. stock at a price of $38.75 a share. Last year you paid
$41.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.64
per share. What is your capital gain on this investment?
A) $550
B) -$222
C) -$3
D) -$550
E) $878
Answer: D
69) One
year ago, Yokino purchased 100 shares of stock for $3,896. Since that time, he has received a
total of $180 in dividends. If he sells the stock at today's market price he will realize a total return on
his investment of 10.37%. Assuming he sells the stock today, what is the dollar amount of his
capital gain per share of stock?
A) $5.84
B) $4.04
C) $2.24
D) $3.68
E) $1.80
Answer: C
70) $1
invested in Canadian Treasury bills in 1957 would have increased in value to approximately
________ by 2005.
A) $10
B) $60
C) $43
D) $23
E) $30
Answer: D
71) Winslow,
Inc. stock is currently selling for $40 a share. The stock has a dividend yield of 3.8%.
How much dividend income will you receive per year if you purchase 500 shares of this stock?
A) $1,053
B) $152
C) $190
D) $329
E) $760
Answer: E
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72) You
purchased a stock one year ago for $91.20. Today you sold the stock and realized a total return
of -63.7% on your investment. During the year you received a total of $2.28 in dividends. At what
price did you sell the stock?
A) $30.83
B) $58.09
C) $55.81
D) $28.55
E) $33.11
Answer: A
73) One
year ago, Kyra purchased a ten-year 5% corporate bond for $986. The bond is currently selling
for $1,002. If Kyra sells the bond today, what is the dollar amount of the total return she would
realize on this investment?
A) $44
B) $14
C) $66
D) $16
E) $34
Answer: C
74) You
just sold 400 shares of Bosley, Inc. stock at a price of $49.60 a share. Last year you paid $50.50
a share to buy this stock. Over the course of the year, you received dividends totaling $1.96 per
share. What is your capital gain on this investment?
A) -$424
B) $424
C) $784
D) $360
E) -$360
Answer: E
75) One
year ago, you purchased 600 shares of Westover Paints stock at a price of $3.68 per share. The
stock pays an annual dividend of $.02 per share. Today, you sold all of your shares for $11.21 per
share. What is your total dollar return on this investment?
A) $4,542
B) $4,575
C) $4,518
D) $5,120
E) $4,530
Answer: E
76) Six
months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share. ABC
stock pays a quarterly dividend of $.10 a share. Today, you sold all of your shares for $45.13 per
share. What is the total amount of your capital gains on this investment?
A) $1.64
B) $164.00
C) $40.00
D) $124.00
E) $1.24
Answer: D
77) One
year ago, Tina purchased 200 shares of Addado Companies at a cost of $38.90 a share. The
stock pays quarterly dividends of $.65 per share. Today, Tina sold her shares for $41.20 per share.
How much dividend income did Tina receive as a result of her ownership of these shares?
A) $130
B) $520
C) $460
D) $275
E) $590
Answer: B
78) $1
invested in large company stocks in 1957 would have increased in value to approximately
________ by 2005.
A) $97
B) $492
C) $60
D) $13,185
E) $1,953
Answer: A
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79) A
year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $9.03 per share.
The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $28.14
per share. What is your total dollar return on this investment?
A) $5,763
B) $5,703
C) $5,733
D) $5,853
E) $5,753
Answer: A
80) Bankers,
Inc. stock is currently selling for $80 a share. The stock has a dividend yield of 4.2%. How
much dividend income will you receive per year if you purchase 150 shares of this stock?
A) $504
B) $120
C) $1,905
D) $630
E) $336
Answer: A
81) You
just sold 450 shares of Zeus, Inc. stock at a price of $51.90 a share. Last year, you paid $36.20
a share when you bought them. Over the course of the year, you received dividends totaling $2.10
per share. What is your capital gain on this investment?
A) $8,010
B) $7,065
C) $6,120
D) $1,090
E) $945
Answer: B
82) You
purchase 100 shares of stock at a price of $45 per share. One year later, the shares are selling for
$47 per share. In addition, a dividend of $4 per share is paid at the end of each year.
What is the total dollar return for the investment?
A) $500
B) $1,200
C) $400
D) $800
E) $600
Answer: E
83) Six
months ago, you purchased 250 shares of QE stock for $18.67 a share. You received dividend
payments equal to $.45 a share. Today, you sold all of your shares for $15.40 a share. What is your
total dollar return on this investment?
A) $930.00
B) -$705.00
C) -$817.50
D) -$930.00
E) $817.50
Answer: B
84) You
purchased a bond on January 1, 2002 for $839.67. The bond has a $1,000 face value, an 8%
annual coupon, and can be sold for $842.33 on December 31, 2002. What is your total dollar return
for the year?
A) $72.34
B) $2.66
C) $77.34
D) $82.66
E) $10.66
Answer: D
85) Six
months ago, you purchased 50 shares of stock in First Place Co. at a price of $41.68 a share.
First Place stock pays a quarterly dividend of $.40 a share. Today, you sold all of your shares for
$44.12 per share. What is the total amount of your dividend income on this investment?
A) $100
B) $40
C) $80
D) $122
E) $20
Answer: B
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86) The dollar
rate of return on an investment can be mathematically defined as:
A) (Dt + Pt+1 - Pt)/Pt.
B) D t+1 + Pt+1 - Pt.
C) (Dt+1 + Pt+1 - Pt)/Pt.
D) (Dt+1/Pt) + (Pt+1 - Pt/Pt).
E) D t + Pt+1 - Pt.
Answer: B
87) You
purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for
$21 each. At that end of the year, a $1.50 per share dividend was paid.
What is the dividend yield for the investment?
A) 7.1%
B) 6.7%
C) -7.1%
D) 0.0%
E) -6.7%
Answer: B
88) You
purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for
$21 each. At that end of the year, a $1.50 per share dividend was paid.
What is the total percentage return for the investment?
A) -6.7%
B) 7.1%
C) 0.0%
D) -7.1%
E) 6.7%
Answer: C
89) You
purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for
$21 each. At that end of the year, a $1.50 per share dividend was paid.
What is the capital gains yield for the investment?
A) -6.7%
B) -7.1%
C) 7.1%
D) 0.0%
E) 6.7%
Answer: A
90) Given
the following historical returns, what is the variance? Year 1 = 8%; year 2 = -12%; year 3 =
6%; year 4 = 1%; year 5 = -19%.
A) 0.0394
B) 0.0139
C) 0.0089
D) 0.0063
E) 0.1178
Answer: B
91) Given
the following returns, what is the variance? Year 1 = 15%; year 2 = 3%; year 3 = -29%; year
4 = -1%.
A) 0.0398
B) 0.0347
C) 0.0137
D) 0.0182
E) 0.0468
Answer: B
92) An
investment earned the following returns for the years 2003 through 2006:-20%, 50%, 30%, and
10%. What is the variance of returns for this investment?
A) 0.1541
B) 0.0892
C) 0.1121
D) 0.1747
E) 0.2987
Answer: B
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93) Calculate
the variance of an investment with five year returns of 10%, 6%, 4%, 2% and (10%).
A) (0.57%)
B) 1.57%
C) 0.57%
D) 2.57%
E) (1.57%)
Answer: C
94) Calculate
the variance of an investment with five year returns of 15%, 10%, 5%, (5%) and (10%).
B) 1.23%
C) 1.13%
D) 1.08%
E) 1.03%
A) 1.18%
Answer: D
95) Angelo
purchased a 7% annual coupon bond one year ago for $987. At the time of purchase, the
bond had six years to maturity. Over the past year inflation has been 3.2%. The market required
return on this bond today is 8%. If Angelo sells the bond today at the market price, what real rate of
return will he realize on this investment?
A) 4.33%
B) 1.17%
C) -1.16%
D) 1.13%
E) 4.36%
Answer: D
96) A
stock has an average rate of return of 11.5% and a standard deviation of 12.8%. What is the
probability that the stock will lose more than 26.9% in any one year?
A) 1.25%
B) 0.50%
C) 1.00%
D) 2.50%
E) 5.00%
Answer: B
97) A
stock produced total returns of 9.78%, 13.61%, 1.19%, and -4.90% over the past four years,
respectively. What is the variance on this set of returns?
A) 0.88%
B) 2.09%
C) 0.70%
D) 1.63%
E) 1.38%
Answer: C
98) Calculate
the variance of an investment with five year returns of 10%, (15%), 12%, 8% and (5%).
B) 1.38%
C) 1.46%
D) 1.62%
E) 1.54%
A) 1.30%
Answer: B
99) A
stock produced total returns of 11.5%, 8.3%, and -2.4% over the past three years, respectively.
Based on this information what range of returns would you expect to see 95% of the time?
A) -8.76% to 20.36%
B) -26.40% to 14.80%
C) -1.48% to 13.08%
D) -16.04% to 27.64%
E) 5.80% to 7.28%
Answer: A
100)
You purchased a stock for $47.00 a share one year ago. Today you sold the stock for $50.21 a share
and realized an 8.51% total rate of return. What was the dividend yield on this stock for the past
year?
A) 1.68%
B) 2.12%
C) 1.88%
D) 2.03%
E) 1.71%
Answer: A
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101)
What are the arithmetic and geometric average returns for a stock with annual returns of 26%, 4%,
-30%, 43%, and 7%?
A) 12.5%; 8.8%
B) 10.0%; 7.0%
C) 12.5%; 7.0%
D) 10.0%; 8.8%
E) 10.0%; 21.8%
Answer: B
102)
Over the 1957-2005 period, the standard deviation of returns for long bonds has averaged ________
per year.
A) 20.35%
B) 33.85%
C) 3.25%
D) 8.65%
E) 10.15%
Answer: E
103)
Over the past five years, Redstone Enterprises produced returns of 31%, 38%, -41%, 8%, and 15%.
The mean of these returns is ________% and the standard deviation is ________%.
A) 26.6; 31.04
B) 10.2; 27.77
C) 10.2; 35.85
D) 26.6; 27.77
E) 10.2; 31.04
Answer: E
104)
You purchased a five-year 6% annual coupon bond one year ago for $990. You sold the bond today
when the market rate of return is 4.5%. If the inflation rate for the past year was 2.0%, what nominal
rate of return did you earn on this investment?
A) 7.07%
B) 11.67%
C) 10.30%
D) 12.51%
E) 8.16%
Answer: D
105)
Destiny Corporation has experienced returns of 9%, 18%, 27% and -15% returns over the past four
years. Given this information, calculate the company's geometric average returns.
A) 14.05%
B) 8.55%
C) 6.75%
D) 12.15%
E) 10.35%
Answer: B
106)
Calculate the standard deviation of an investment with five year returns of 15%, 10%, 5%, (5%) and
(10%).
A) 10.37%
B) 12.37%
C) 8.37%
D) 9.37%
E) 11.37%
Answer: A
107)
ABC stock pays a $1.80 annual dividend. The market price of the stock was $21.74, $19.83, $22.60,
and $23.10 at the end of the past four years, respectively. Based on this information, what is the
mean rate of return?
A) 11.25%
B) 10.91%
C) 19.14%
D) 21.82%
E) 9.67%
Answer: B
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108)
Nine months ago, you purchased 350 shares of Southland, Inc. stock at a price of $62.47 a share.
The company pays quarterly dividends of $.85 a share. Today, you sold all of your shares for $67.82
a share. What is your total percentage return on this investment?
A) 12.65%
B) 13.33%
C) 10.08%
D) 9.93%
E) 11.29%
Answer: A
109)
Baker's Chocolate common stock had annual returns of 13.7%, 11.3%, 4.6%, and - 8.9% over the
last four years, respectively. What is the standard deviation of these returns?
A) 11.3%
B) 11.8%
C) 10.1%
D) 10.7%
E) 12.1%
Answer: C
110)
Today, you sold 700 shares of RZX stock. Your total return on these shares is 16.2%. You
purchased the shares one year ago at a price of $33.40 a share. You received a total of $770 in
dividends over the course of the year. What is your capital gains yield on this investment?
A) 12.91%
B) 9.84%
C) 11.88%
D) 11.42%
E) 10.37%
Answer: A
111)
An investor purchases 1,000 shares of a company at a purchase price of $18.00 at the start of the
year. During the year, the company paid out $0.75 of dividends per share. The investor then sells all
the shares at a selling price of $19.50. Determine the investor's total percentage return.
A) 11.00%
B) 12.00%
C) 10.50%
D) 11.50%
E) 12.50%
Answer: E
112)
One year ago, Stephen purchased 100 shares of K&L stock at a price of $18 a share. Today, he sold
the stock and realized a total return of 20%. His capital gain was $3.60 a share. What is the current
dividend yield on this stock?
A) 10.0%
B) 13.3%
C) 0%
D) 14.8%
E) 20.0%
Answer: C
113)
Given the following historical returns, what is the standard deviation? Year 1 = 20%; year 2 = -12%;
year 3 = 16%; year 4 = 3%; year 5 = -15%.
A) 12.48%
B) 11.89%
C) 14.18%
D) 15.85%
E) 16.87%
Answer: D
114)
You purchased 200 shares of preferred stock on January 1, 2002 for $42.27 per share. The stock
pays an annual dividend of $5 per share. On December 31, 2002 the market price is $43.88 per
share. What is your percentage return on investment for the year?
A) 4.9%
B) 8.0%
C) 15.1%
D) 15.6%
E) 14.9%
Answer: D
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115)
Seven months ago, you purchased a stock at a price of $36.04 a share. Today, you sold those shares
for $43.15 a share. During the past seven months, you have received dividends totaling $0.24 a
share while inflation has averaged 3.6%. What is your approximate real rate of return on this
investment?
A) 13.4%
B) 16.1%
C) 16.8%
D) 12.9%
E) 16.5%
Answer: C
116)
Six months ago, you purchased a stock at a price of $31.88 a share. Today, you sold those shares for
$37.51 a share. During the past six months, you have received dividends totaling $0.46 a share
while inflation has averaged 3.3%. What is your approximate real rate of return on this investment?
A) 19.2%
B) 15.8%
C) 17.3%
D) 20.1%
E) 14.4%
Answer: B
117)
You purchased a bond for $900 one year ago. Today, you receive your only interest payment for the
year of $100. The bond can currently be sold for $975. What is your total percentage return on
investment? Ignore tax effects.
A) 18.0%
B) 11.1%
C) 23.8%
D) 19.4%
E) 8.3%
Answer: D
118)
Over the last three years you earned 5%, 7%, and 9%. What is the standard deviation of your
returns?
A) 0.8%
B) 2.9%
C) 2.0%
D) 2.3%
E) 1.6%
Answer: C
119)
A stock produced total returns of 10.4%, -11.9%, - 21.7%, and 31.2% over the past four years,
respectively. What is the average rate of return for this period of time?
A) 2.00%
B) 2.67%
C) 1.50%
D) 2.34%
E) 1.67%
Answer: A
120)
Over the 1957-2005 period, the risk premium on long bonds has averaged ________ per year.
A) 8.88%
B) 0.0%
C) 2.25%
D) 13.62%
E) 1.63%
Answer: C
121)
Over the 1970-2005 period, the risk premium on small stocks has averaged ________ per year.
A) 0.0%
B) 1.95%
C) 14.16%
D) 2.35%
E) 7.53%
Answer: E
122)
Over the 1957-2005 period, the risk premium on Canadian common stocks has averaged ________
per year.
A) 0.0%
B) 10.97%
C) 1.96%
D) 2.36%
E) 4.35%
Answer: E
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123)
Use the following historical average returns and standard deviations to answer the question below.
Based on the historical data above, what is your reward for bearing risk of owning small-company
stocks rather than Canadian common stocks?
A) 0.80%
B) 1.60%
C) 4.25%
D) 1.59%
E) 2.39%
Answer: D
124)
A stock had returns of 10%, 2%, 8%, 17%, and - 7% for the past five years. Based on these returns,
what is the approximate probability that this stock will return at least 15% in any one given year?
A) 2.5%
B) 1.0%
C) 16.0%
D) 5.0%
E) 0.5%
Answer: C
125)
Leah Merryweather stock has an expected rate of return of 12.5% and a standard deviation of
26.3%. Which one of the following best describes the probability that this stock will lose 40% or
more in any one given year?
A) 1.0%
B) 0.5%
C) 16.0%
D) 2.5%
E) 5.0%
Answer: D
126)
Your friend is the owner of a stock which had returns of 6%, 17%, and 1% for the past three years.
Your friend thinks the stock may be able to achieve a return of 32.6% or more. Based on these
returns, what is the probability that this stock will earn at least the 32.6% in any one given year?
A) 2.5%
B) 0.5%
C) 5.0%
D) 16.0%
E) 1.0%
Answer: B
127)
Assume that for some period of time corporate bonds had an average rate of return of 5.4% while
Treasury bills returned 2.8% and inflation averaged 2.7%. Given these assumptions, what is the risk
premium on corporate bonds?
A) 2.7%
B) -0.1%
C) 2.8%
D) 2.6%
E) 0.1%
Answer: D
128)
Sam purchased a stock for $46.91 one year ago. Today he sold the stock for $48.03. The stock paid
a total of $1.40 in dividends over the year. What capital gains yield did Sam realize on this
investment?
A) 3.13%
B) 2.39%
C) 5.37%
D) 2.67%
E) 2.33%
Answer: B
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129)
One year ago, Valerie purchased a stock at a price of $26 a share. Today, she sold those shares for
$26.50 a share. During the past year, she received dividends totaling $0.50 a share while inflation
averaged 2.8%. What is Valerie's real rate of return on this investment?
A) 3.40%
B) 1.49%
C) 3.85%
D) 2.67%
E) 1.02%
Answer: E
130)
Federico paid $86.70 for a stock one year ago. Today he sold the stock for $88.20. Over the year,
Federico received four quarterly dividends of $0.60 each. What was the dividend yield on this
investment?
A) 4.42%
B) 2.77%
C) 0.69%
D) 4.50%
E) 1.02%
Answer: B
131)
Theta stock returned 2%, -5%, 12%, and 28% for the past four years, respectively. Based on this
information, what is the 95% probability range of returns for any one given year?
A) -19.38 to 37.88%
B) -26.34 to 44.84%
C) -34.02 to 52.52%
D) -11.68 to 30.18%
E) -40.33 to 50.51%
Answer: A
132)
A stock has returns of 5%, 16%, -18%, and 11% for the past four years. Based on this information,
what is the 99% probability range for any one given year?
A) -41.6 to 48.6%
B) -8.6 to 13.6%
C) -11.5 to 18.5%
D) -26.5 to 33.5%
E) -35.5 to 42.5%
Answer: A
133)
If we assume that the annual return on common stocks are normally distributed, then approximately
95% of the returns will fall within the range ________% if the average historical return is 13.2%
with a standard deviation of 20.3%.
A) -7.1 to 33.5
B) 7.1 to 33.5
C) -5.1 to 45.7
D) -27.4 to 53.8
E) -27.4 to 33.5
Answer: D
134)
Calculate the geometric return of an investment with five year returns of 10%, 6%, 4%, 2% and
(10%).
A) 5.40%
B) 2.40%
C) 4.40%
D) 1.40%
E) 3.40%
Answer: B
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135)
A stock had the following prices and dividends. What is the geometric average return on this stock?
A) 2.7%
B) 5.4%
C) 2.1%
D) 3.7%
E) 3.6%
Answer: E
136)
A stock had the following prices and dividends. What is the geometric average return on this stock?
A) 4.0%
B) 3.6%
C) 3.8%
D) 3.2%
E) 3.4%
Answer: E
137)
Last year, Sylvia purchased 300 shares of Webster Companies stock at a price of $40.27 per share.
Today, those shares are valued at $38.20 a share. Over the last year, Sylvia received total dividend
income of $450. What is the current dividend yield on Webster stock if the firm pays a constant
dividend?
A) 3.72%
B) 4.15%
C) 3.93%
D) 4.30%
E) 3.64%
Answer: C
138)
One year ago, you purchased a stock at a price of $40 a share. Today, you sold the stock and realized
a total return of 30%. Your capital gain was $8 a share. What was your dividend yield on this stock?
A) 40%
B) 10%
C) 50%
D) 20%
E) 30%
Answer: B
139)
A stock returned 14%, -22%, 3%, and 34% over the past four years, respectively. What is the
standard deviation of this stock based on the past four years?
A) 26.98%
B) 31.60%
C) 38.67%
D) 40.43%
E) 23.34%
Answer: E
140)
Over the past four years a stock produced annual returns of 4%, -18%, - 21%, and 48%,
respectively. Based on this information, what is the standard deviation for this stock?
A) 31.85%
B) 34.62%
C) 18.03%
D) 27.58%
E) 55.16%
Answer: A
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141)
You purchased 500 shares of Brown Stone stock for $41.80 a share. You have received a total of
$820 in dividends and $7,280 in proceeds from selling the shares. What is your capital gains yield
on this stock?
A) 3.99%
B) 38.76%
C) 3.92%
D) 34.83%
E) 32.38%
Answer: D
142)
What is the amount of the excess return on a risk-free security if the risk-free rate is 4% and the
market rate of return is 11%?
A) 7%
B) 4%
C) 2%
D) 11%
E) 0%
Answer: E
143)
Over the past five years a stock produced annual returns of 11%, 16%, 5%, 2%, and 9%,
respectively. Based on this information, what is the standard deviation for this stock?
A) 5.09%
B) 4.03%
C) 3.88%
D) 5.42%
E) 2.94%
Answer: D
144)
Marti purchased a stock one year ago at a price of $23.89. Over the past year she has received a total
of $1.63 in dividends. Today she sold the stock for $22.84. What percentage total return did Marti
earn on this investment?
A) 4.40%
B) 7.14%
C) 2.54%
D) 6.82%
E) 2.43%
Answer: E
145)
You purchased 300 shares of Deltona, Inc. stock for $44.90 a share. You have received a total of
$630 in dividends and $14,040 in proceeds from selling the shares. What is your capital gains yield
on this stock?
A) 4.23%
B) 8.91%
C) 8.55%
D) 4.68%
E) 4.06%
Answer: A
146)
Calculate the geometric return of an investment with five year returns of 10%, (15%), 12%, 8% and
(5%).
A) 3.11%
B) 7.44%
C) 6.33%
D) 5.22%
E) 2.00%
Answer: B
147)
Calculate the arithmetic return of an investment with five year returns of 10%, (15%), 12%, 8% and
(5%).
A) 6.33%
B) 5.22%
C) 7.44%
D) 3.11%
E) 2.00%
Answer: E
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148)
Use the following historical average returns and standard deviations to answer the question below.
What is the historical risk premium of Canadian common stocks over long bonds?
A) 7.15%
B) 8.75%
C) 7.16%
D) 5.56%
E) 1.60%
Answer: D
149)
Ajax Corporation has experienced returns of 12%, 15%, 8% and 2% returns over the past four years.
Given this information, calculate the company's standard deviation.
A) 6.04%
B) 6.56%
C) 5.04%
D) 4.88%
E) 5.62%
Answer: E
150)
LK Pattern Shops had the following prices and dividends for the past 4 years. What is the geometric
average rate of return on this stock based on this period of time?
A) 5.7%
B) 5.6%
C) 5.9%
D) 5.8%
E) 5.5%
Answer: A
151)
If the returns on small-company stocks are normally distributed, which of the following returns
would lie in a 99% confidence interval around the mean, but not in a 95% confidence interval?
A) -10%
B) -30%
C) 50%
D) 90%
E) 70%
Answer: E
152)
Assume the return on T-bills is normally distributed. Assuming a 68% probability, what is the
highest return you would expect to earn on T-bills?
A) 4.04%
B) 2.00%
C) 10.08%
D) 14.12%
E) 6.04%
Answer: C
153)
A stock had returns of 6%, 13%, -11%, and 17% over the past four years. What is the geometric
average return for this time period?
A) 5.7%
B) 6.2%
C) 8.2%
D) 4.5%
E) 7.3%
Answer: A
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154)
One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized
a total return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock?
A) 18.75%
B) 1.25%
C) 21.25%
D) 3.75%
E) 6.25%
Answer: E
155)
A stock had returns of 9%, -3%, 4%, and 15% over the past four years. What is the standard
deviation of this stock for the past four years?
A) 7.6%
B) 6.3%
C) 5.4%
D) 6.6%
E) 5.9%
Answer: A
156)
Last year, Marsha purchased a stock at a price of $21.36 a share. Over the course of the year, she
received $.60 in dividends per share while inflation averaged 3.2%. Today, Marsha sold her shares
for $22.80 a share. What is Marsha's real rate of return on this investment?
A) 6.30%
B) 6.51%
C) 6.44%
D) 5.85%
E) 6.15%
Answer: E
157)
An investor purchases 500 shares of a company at a purchase price of $15.00 at the start of the year.
During the year, the company paid out $0.50 of dividends per share. The investor then sells all the
shares at a selling price of $13.50. Determine the investor's total percentage return.
A) -6.37%
B) -6.07%
C) -6.67%
D) -5.67%
E) -7.07%
Answer: C
158)
You purchased 200 shares of Hypex, Inc. stock for $38.12 a share. You have received a total of
$290 in dividends and $8,130 in proceeds from selling the shares. What is your capital gains yield
on this stock?
A) 10.4%
B) 4.2%
C) 3.8%
D) 8.0%
E) 6.6%
Answer: E
159)
Today, you sold 200 shares of SLG, Inc. stock. Your total return on these shares is 12.5%. You
purchased the shares one year ago at a price of $28.50 a share. You have received a total of $280 in
dividends over the course of the year. What is your capital gains yield on this investment?
A) 7.59%
B) 4.80%
C) 6.67%
D) 11.67%
E) 5.00%
Answer: A
160)
You purchased 300 shares of stock at a price of $35.86 per share. Over the last year, you have
received total dividend income of $336. What is the dividend yield?
A) 9.4%
B) 6.8%
C) 10.7%
D) 1.1%
E) 3.1%
Answer: E
161)
An investor purchases 200 shares of a company at a purchase price of $30.00 at the start of the year.
During the year, the company paid out $1.75 of dividends per share. The investor then sells all the
shares at a selling price of $27.00. Determine the investor's total percentage return.
A) -7.38%
B) -6.89%
C) -4.17%
D) -9.81%
E) -5.55%
Answer: C
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162)
The three probability ranges used with a normal distribution are defined as the ________ ranges.
A) 68%, 95%, and 99%
B) 75%, 85%, and 95%
C) 68%, 75%, and 99%
D) 68%, 85%, and 95%
E) 68%, 85%, and 99%
Answer: A
163)
A stock had returns of 8%, 11%, -2%, 5%, and 13% over the past 5 years, respectively. What is the
geometric average rate of return for this time period?
A) 6.73%
B) 6.87%
C) 7.13%
D) 7.89%
E) 7.42%
Answer: B
164)
Destiny Corporation has experienced returns of 20%, -10%, 25% and -5% returns over the past four
years. Given this information, calculate the company's geometric average returns.
A) 7.22%
B) 8.02%
C) 6.42%
D) 7.62%
E) 6.82%
Answer: C
165)
What are the geometric and arithmetic average returns for a stock with annual returns of 5%, 10%,
-8%, and 16%?
A) 5.37%; 5.75%
B) 6.49%; 7.67%
C) 7.22%; 7.67%
D) 7.22%; 5.75%
E) 9.68%; 5.75%
Answer: A
166)
A stock had returns of 5%, 16%, - 10%, and 18% over the past four years. What is the geometric
average return for this time period?
A) 6.6%
B) 7.3%
C) 12.1%
D) 5.3%
E) 9.7%
Answer: A
167)
Today, you sold 100 shares of Natural, Inc. stock. Your total return on these shares is 10.5%. You
purchased the shares one year ago at a price of $25.75 a share. You have received a total of $110 in
dividends over the course of the year. What is your capital gains yield on this investment?
A) 9.75%
B) 9.50%
C) 7.77%
D) 6.23%
E) 6.60%
Answer: D
168)
Last year, you purchased a stock at a price of $53.60 a share. Over the course of the year, you
received $1.50 in dividends and inflation averaged 2.9%. Today, you sold your shares for $55.90 a
share. What is your approximate real rate of return on this investment?
A) 8.6%
B) 7.9%
C) 10.0%
D) 7.1%
E) 4.2%
Answer: E
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169)
What percentage of the population is represented within one standard deviation?
A) 74%
B) 70%
C) 72%
D) 68%
E) 66%
Answer: D
170)
Bianco Corporation has experienced returns of -5%, 20%, 10% and -8% returns over the past four
years. Given this information, calculate the company's standard deviation.
A) 5.89%
B) 8.02%
C) 6.09%
D) 13.12%
E) 10.08%
Answer: D
171)
Eight months ago, you purchased 400 shares of Winston, Inc. stock at a price of $54.90 a share. The
company pays quarterly dividends of $.50 a share. Today, you sold all of your shares for $49.30 a
share. What is your total percentage return on this investment?
A) 12.0%
B) -8.4%
C) -10.2%
D) -9.3%
E) 13.4%
Answer: B
172)
You purchase 100 shares of stock at a price of $45 per share. One year later, the shares are selling for
$47 per share. In addition, a dividend of $4 per share is paid at the end of each year.
What is the dividend yield for the investment?
A) 5.5%
B) 9.7%
C) 8.9%
D) 4.4%
E) 8.5%
Answer: C
173)
You purchase 100 shares of stock at a price of $45 per share. One year later, the shares are selling for
$47 per share. In addition, a dividend of $4 per share is paid at the end of each year.
What is the capital gains yield for the investment?
A) 4.4%
B) 5.5%
C) 8.9%
D) 8.5%
E) 13.3%
Answer: A
174)
You purchased a bond on January 1, 2002 for $839.67. The bond has a $1,000 face value, an 8%
annual coupon, and can be sold for $822.33 on December 31, 2002. What is your percentage return
on investment for the year?
A) 11.6%
B) 7.5%
C) 11.8%
D) 8.6%
E) -2.1%
Answer: B
175)
What are the arithmetic and geometric average returns for a stock with annual returns of 21%, 8%,
-32%, 41%, and 5%?
A) 5.6%; 8.6%
B) 5.6%; 6.3%
C) 8.6%; 8.6%
D) 8.6%; 6.3%
E) 8.6%; 5.6%
Answer: E
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176)
You purchase 100 shares of stock at a price of $45 per share. One year later, the shares are selling for
$47 per share. In addition, a dividend of $4 per share is paid at the end of each year.
What is the total percentage return for the investment?
A) 13.3%
B) 8.9%
C) 8.5%
D) 12.8%
E) 5.5%
Answer: A
177)
The common stock of Petersen and White Importers yielded returns of 42%, -5%, -18%, 9%, and
12% over the past 5 years, respectively. The arithmetic average return for this period of time is
________% while the geometric average return is ________%.
A) 10; 9.20
B) 10; 9.84
C) 8; 7.80
D) 8; 7.01
E) 8; 6.19
Answer: E
178)
An investor purchased a stock for $1.61 per share, held it for one year, and sold it for $3.03 a share.
The stock did not pay a dividend. Inflation for that year was 3.2% and Treasury bills returned 3.7%.
What is the real rate of return on this investment?
A) 84.63%
B) 85.00%
C) 75.17%
D) 88.20%
E) 82.36%
Answer: E
179)
Treadwell Motors stock returned 11%, 14%, 3%, and 9% over the past 4 years, respectively. The
arithmetic average return for this period is ________%.
A) 11.87%
B) 9.17%
C) 12.33%
D) 9.25%
E) 9.00%
Answer: D
180)
Over the 1957-2005 period, the standard deviation of returns for Canadian common stocks has
averaged ________ per year.
A) 16.17%
B) 33.27%
C) 8.67%
D) 9.27%
E) 3.27%
Answer: A
181)
Over the 1970-2005 period, the standard deviation of returns for small stocks has averaged
________ per year.
A) 22.58%
B) 8.68%
C) 9.28%
D) 20.38%
E) 3.28%
Answer: A
182)
Calculate the arithmetic return of an investment with five year returns of 10%, 6%, 4%, 2% and
(10%).
A) 11.32%
B) 8.32%
C) 7.32%
D) 9.32%
E) 10.32%
Answer: A
183)
Calculate the arithmetic return of an investment with five year returns of 15%, 10%, 5%, (5%) and
(10%).
A) 3.00%
B) 5.23%
C) 11.38%
D) 9.41%
E) 13.57%
Answer: A
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184)
Calculate the geometric return of an investment with five year returns of 15%, 10%, 5%, (5%) and
(10%).
A) 11.38%
B) 5.23%
C) 13.57%
D) 3.00%
E) 9.41%
Answer: C
185)
Calculate the standard deviation of an investment with five year returns of 10%, 6%, 4%, 2% and
(10%).
A) 7.54%
B) 9.54%
C) 13.54%
D) 11.54%
E) 5.54%
Answer: A
186)
Use the following historical average returns and standard deviations to answer the question below.
What is the historical risk premium on Canadian common stocks?
A) 7.16%
B) 1.60%
C) 0%
D) 8.75%
E) 9.55%
Answer: A
187)
Calculate the standard return of an investment with five year returns of 10%, (15%), 12%, 8% and
(5%).
A) 11.73%
B) 7.73%
C) 9.73%
D) 8.73%
E) 10.73%
Answer: A
188)
Over the past five years, a stock produced returns of 12%, 26%, -10%, 4%, and 13%. What is the
probability that an investor in this stock will NOT lose more than 17.5% nor earn more than 35.5%
in any one given year?
A) 100%
B) 95%
C) 34%
D) 68%
E) 99%
Answer: B
189)
The normal distribution is useful in analyzing security returns because:
A) 95% of all observations fall within three standard deviations of the mean.
B) It can be completely described by its mean and standard deviation.
C) Of its bell-shaped appearance.
D) We frequently deal with finite data sets.
E) The distribution of security returns is usually different from a normal distribution.
Answer: B
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190)
What percentage of the population is represented within one standard deviation?
A) 95%
B) 96%
C) 97%
D) 98%
E) 99%
Answer: A
191)
A stock had returns of 7%, 31%, 16%, and - 22% for the past four years. Which one of the
following best describes the probability that this stock will NOT lose more than 59% in any one
given year?
A) 84.0%
B) 95.0%
C) 97.5%
D) 99.0%
E) 99.5%
Answer: E
192)
What percentage of the population is represented within one standard deviation?
A) 96%
B) 97%
C) 98%
D) 99%
E) 100%
Answer: D
193)
Which of the following two stocks is more volatile based on historical returns?
A) A
because it has a higher standard deviation
it has a lower standard deviation
C) A because it has a lower mean
D) B because it has a higher mean
E) B because it has a higher variance
B) B because
Answer: A
194)
Last year you purchased a stock at $21.63 a share. Today you sold your shares at $23.01 after
receiving your quarterly dividend. The total return on this stock consists of:
A) A capital loss and a dividend yield.
B) A dividend yield and a risk-free rate of return.
C) A capital gain only.
D) A capital gain and a dividend yield.
E) A capital loss only.
Answer: D
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195)
You are considering two investments. You note that the return on investment A tends to vary quite
widely from its average, definitely more so than does investment B. Based on this, you believe that:
A) A has a lower standard deviation than B.
B) A has a higher return volatility than B.
C) A has a higher inflation premium than B.
D) A has a lower variance than B.
E) A must be stock in one of the largest Canadian firms while B must be stock in one of the
smallest firms listed on the TSX
Answer: B
196)
Historical information has shown that there is ________ relationship between the rate of return and
the risk of an investment.
A) An inverse
B) A direct
C) A random
D) No
E) An indirect
Answer: B
197)
Last year you purchased 100 shares of Marvel Entertainment stock for $12 per share. According to
today's quote in The National Post, the stock is currently selling for $18 per share. The stock pays
no dividends. Your return on this investment is comprised of ________.
A) A real return only.
B) A dividend yield only.
C) A capital gains return only.
D) An income return and a capital gains return.
E) An income return only.
Answer: C
198)
Which of the following is the best definition for the concept of "risk premium"?
A) The average compound return earned per year over a multi-year period.
B) A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard
deviation.
C) Market in which security prices reflect available information.
D) The excess return required from an investment in a risky asset over a risk-free investment.
E) The hypothesis is that actual capital markets are efficient.
Answer: D
199)
Which of the following is the best definition for the concept of "normal distribution"?
A) The excess return required from an investment in a risky asset over a risk-free investment.
B) A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard
deviation.
C) The hypothesis is that actual capital markets are efficient.
D) The average compound return earned per year over a multi-year period.
E) Market in which security prices reflect available information.
Answer: B
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200)
Which of the following is the best definition for the concept of "geometric average return"?
A) The average compound return earned per year over a multi-year period.
B) Market in which security prices reflect available information.
C) The excess return required from an investment in a risky asset over a risk-free investment.
D) The hypothesis is that actual capital markets are efficient.
E) A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard
deviation.
Answer: A
201)
Which of the following is the best definition for the concept of "efficient capital market"?
A) The excess return required from an investment in a risky asset over a risk-free investment.
B) Market in which security prices reflect available information.
C) The average compound return earned per year over a multi-year period.
D) The hypothesis is that actual capital markets are efficient.
E) A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard
deviation.
Answer: B
202)
The semi-strong form of market efficiency is best described as a market where ________ reflected
in the current security prices.
A) all public information is
B) all insider information is
C) all historical market prices are
D) all information, publicly known or not, is
E) all information of every kind is
Answer: A
203)
The total of the deviations of actual returns from the average return will:
A) Always be equal to zero.
B) Always be greater than the average return.
C) Be greater the larger the degree of volatility.
D) Sometimes be positive and sometimes be negative.
E) Always be positive and greater than zero.
Answer: A
204)
If the securities market is strong-form efficient, then:
A) Any delayed market reaction to an announcement will be corrected within one week.
B) All securities should be correctly priced.
C) All investments in securities will have a positive net present value.
D) Only insider information can provide a trading advantage.
E) Any mispricing will exist only in small-company stocks.
Answer: B
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205)
The nominal rate of return minus the inflation rate is called the:
A) Indexed rate.
B) Base rate.
C) Compound rate.
D) Exact real rate.
E) Approximate real rate.
Answer: E
206)
Financial markets fluctuate daily because they:
A) Are inefficient.
B) Are continually reacting to new information.
C) Offer tremendous arbitrage opportunities.
D) Slowly react to new information.
E) Only reflect historical information.
Answer: B
207)
Individuals that continually monitor the financial markets seeking mispriced securities:
A) Are always quite successful using only historical price information as their basis of evaluation.
B) Tend to make the markets more efficient.
C) Are never able to find a security that is temporarily mispriced.
D) Are always quite successful using only well-known public information as their basis of
evaluation.
E) Tend to make substantial profits on a daily basis.
Answer: B
208)
The capital gains yield plus the dividend yield on a security is called the:
A) Variance of returns.
B) Summation of returns.
C) Geometric return.
D) Total return.
E) Average period return.
Answer: D
209)
A normal distribution is a statistical distribution that is defined by its:
A) Mean and standard deviation.
B) Average rate of return and variance.
C) Probability ranges.
D) Mean and capital gain ranges.
E) Historical rates of return.
Answer: A
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210)
The variance of returns is computed by dividing the sum of the:
A) Squared deviations by the number of returns minus one.
B) Average returns by the number of returns minus one.
C) Squared deviations by the average rate of return.
D) Average returns by the number of returns plus one.
E) Squared deviations by the number of returns plus one.
Answer: A
211)
Which of the following is true about risk and return?
A) The reward for bearing risk is known as the standard deviation.
B) Based on historical data, there is no reward for bearing risk.
C) In general, the higher the risk the higher the expected return.
D) Riskier assets will, on average, earn lower returns.
E) An increase in the risk of an investment will result in a decreased risk premium.
Answer: C
212)
The total return on a security is computed as the summation of the dividend income and the capital
gain expressed as a percentage of the security's:
A) Ending market value.
B) Current book value.
C) Average book value.
D) Average market value.
E) Beginning market value.
Answer: E
213)
A symmetric, bell-shaped statistical distribution that is completely defined by its mean and standard
deviation is the ________ distribution.
A) Poisson
B) uniform
C) normal
D) gamma
E) bi-modal
Answer: C
214)
Which one of the following statements is true concerning market performance over the period
1957-2005?
A) Canadian Treasury bills tend to pay a higher rate of return than do long-term bonds.
B) Canadian Treasury bills always have a positive real rate of return.
C) Over the long-term, large-company stocks outperform small-company stocks.
D) Over the short-term, small-company stocks are less volatile than large-company stocks.
E) Canadian Treasury bills have paid returns in excess of 10% in some years.
Answer: E
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215)
If capital markets are semi-strong form efficient, then:
A) Stock analysts have a trading advantage because of their access to vast amounts of public
information.
B) Studying past prices will help predict the future performance of a security.
C) Company insiders can profit based on the inside information.
D) Individuals can identify mispriced stocks using publicly available information.
E) Traders can earn exceptional profits using publicly available information.
Answer: C
216)
The geometric average return is defined as the ________ over a multi-year period.
A) square root of the compound return earned
B) average compound return earned per year
C) return earned in an average year
D) compound return earned
E) average rate of return earned per year
Answer: B
217)
The arithmetic average return is defined as the ________ over a multiyear period.
A) average rate of return earned per year
B) square root of the compound return earned
C) return earned in an average year
D) average compound return earned per year
E) compound return earned
Answer: C
218)
To convince investors to accept greater volatility in the annual rate of return on an investment, you
must:
A) Decrease the expected rate of return.
B) Increase the risk premium.
C) Decrease the risk premium.
D) Increase the risk-free rate of return.
E) Decrease the risk-free rate of return.
Answer: B
219)
Which of the following correctly completes this sentence: When calculating your return on
investment you should ignore ________.
A) fees you are charged in the process of purchasing the asset in question
B) paper capital losses that occur
C) dividends that have been declared on the stock you own if you have not yet received the
dividend
D) losses you avoided by not buying a stock that has since decreased in price
E) paper gains which you could have obtained by cashing out
Answer: D
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220)
If a market is efficient, then the difference between the market value of an investment and its cost is:
A) Zero.
B) Equal to the risk-free rate of return.
C) Equal to the risk premium.
D) Positive and greater than 1.
E) Equal to the net present value of the cash inflows.
Answer: A
221)
The excess return required on a risky asset over that earned on a risk-free asset is called a(n):
A) Variance.
B) Return premium.
C) Risk premium.
D) Excess return.
E) Average return.
Answer: C
222)
The square of the standard deviation is called the:
A) Risk premium.
B) Average rate of return.
C) Variance.
D) Probability range.
E) Excess return.
Answer: C
223)
IBM announces that earnings per share for the current quarter are $1.25; this figure is barely half of
what investors and analysts expected. In an efficient market, the price of IBM stock will:
A) Probably not change at all.
B) First fall, reflecting investors' surprise; then rise back somewhat as investors assimilate the new
information.
C) change immediately to reflect changes in investor expectations
D) Fall only if there is additional unfavourable news about IBM announced at the same time.
E) Gradually fall over several days as investors assimilate the new information.
Answer: C
224)
If the financial markets are efficient, then investors should expect their investments in those markets
to:
A) Generally have zero net present values.
B) Earn extraordinary returns on a routine basis.
C) Produce negative returns on a routine basis.
D) Generally have positive net present values.
E) Produce arbitrage opportunities on a routine basis.
Answer: A
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225)
Over the long-term, the greater the volatility in the returns on a risky security the:
A) Lower the average risk premium.
B) Greater the risk-free rate of return.
C) Lower the average capital gains yield.
D) Greater the average risk premium.
E) Lower the average total return.
Answer: D
226)
If the stock market is weak form efficient, then an investor can NOT earn excess profits by:
A) Identifying mispriced securities.
B) Trading on insider information.
C) Studying financial statements as they become available.
D) Trading on newly released public information.
E) Studying historical price patterns.
Answer: E
227)
Which one of the following statements is correct concerning market efficiency?
A) A firm will generally receive a fair price when it sells shares of stock.
B) In an efficient market, some market participants will have an advantage over others.
C) If a market is efficient, arbitrage opportunities should be common.
D) New information will gradually be reflected in a stock's price to avoid any sudden change in
the price of the stock.
E) Real asset markets are more efficient than financial markets.
Answer: A
228)
Based on the historical record from 1957 to 2005, which of the following types of Canadian
securities earned the SECOND highest return?
A) Small stocks
B) Inflation
C) Canadian Treasury bills
D) Common stocks (S&P/TSX Composite)
E) Long bonds
Answer: D
229)
Which one of the following has the highest risk premium based on historical information?
A) Small-company stocks
B) Government bonds
C) Corporate bonds
D) Large-company stocks
E) Canadian Treasury bill
Answer: A
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230)
Milner's stock had annual returns of 11.4%, 2.6%, and 14.8% over the past three years. Which one
of the following best describes the probability that this stock will produce a return of 25% or more
next year?
A) less than 0.1%
B) less than 0.5%
C) less than 1.0%
D) less than 2.5%
E) less than 5%
Answer: D
231)
A stock has an expected rate of return of 8.3% and a standard deviation of 6.4%. Which one of the
following best describes the probability that this stock will lose 11% or more in any one given year?
A) less than 0.5%
B) less than 1.0%
C) less than 1.5%
D) less than 2.5%
E) less than 5%
Answer: A
232)
A stock has an expected rate of return of 7.9% and a standard deviation of 6.2%. Which one of the
following best describes the probability that this stock will lose more than 4.5% in any one given
year?
A) less than 0.5%
B) less than 1.0%
C) less than 1.5%
D) less than 2.5%
E) less than 5%
Answer: D
233)
As long as the inflation rate is positive, the real rate of return on a security investment will be
________ the nominal rate of return.
A) Less than.
B) Greater than.
C) Unrelated to.
D) Equal to.
E) Greater than or equal to.
Answer: A
234)
A portfolio of large company stocks would contain which one of the following types of securities?
A) Stocks of firms included in the TSX/S&P Composite index.
B) Long-term government bonds.
C) Long-term corporate bonds.
D) Treasury bills.
E) Stock of the firms which represent the smallest 20% of the companies listed on the TSX.
Answer: A
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235)
Which of the following is likely to be associated with the highest level of risk?
A) Common stock of the largest companies in Canada
B) Long-term government bonds
C) Long-term corporate bonds
D) Common stock of the smallest companies listed on the TSX
E) Treasury bills
Answer: D
236)
Which one of the following types of investments would be associated with the narrowest bell curve?
A) Large-company stocks.
B) Small-company stocks.
C) Treasury bills.
D) Long-term government bonds.
E) Corporate bonds.
Answer: C
237)
The higher the standard deviation of a stock the:
A) Greater the probability of losing more than 50% of your investment in any one year.
B) Narrower the bell curve and the smaller the probability ranges.
C) Greater the probability that the actual return for any one year will equal the average historical
return.
D) Lower the risk premium given a normal market.
E) Lower the volatility level over a period of time.
Answer: A
238)
The dividend yield is computed as the annual dividend in year t + 1 divided by the:
A) Annual dividend in year t.
B) Average value in year t.
C) Market value in year t.
D) Market value in year t + 1.
E) Average value in year t + 1.
Answer: C
239)
The 95% probability range for returns is defined as the:
A) Risk premium plus or minus two times the standard deviation.
B) Risk premium plus or minus two times the variance.
C) Mean plus or minus three times the variance.
D) Mean plus or minus two times the standard deviation.
E) Mean plus or minus three times the standard deviation.
Answer: D
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240)
The real rate of return on a stock is approximately equal to the nominal rate of return:
A) Plus the inflation rate.
B) Multiplied by (1 + inflation rate).
C) Divided by (1 + inflation rate).
D) Minus the inflation rate.
E) Divided by (1 - inflation rate).
Answer: D
241)
The capital gains yield on a security:
A) Is equal to the change in the security's value expressed as a percentage of the security's
beginning market value.
B) Is equal to the change in the security's value expressed as a percentage of the security's current
market value.
C) Is equal to the total return on the security expressed as a percentage of the ending market value.
D) Must be a positive value if the ending value of the security is positive.
E) Is equal to the total return on the security expressed as a percentage of the beginning market
value.
Answer: A
242)
The market return on the Canadian Treasury bill is generally used as the measure of the:
A) Risk premium on government bonds.
B) Nominal risk premium rate of return.
C) Real rate of return on a risk-free investment.
D) Risk-free rate of return.
E) Real rate of market return.
Answer: D
243)
Based on the period 1957-2005, the standard deviation:
A) Of Treasury bills was 0.0%.
B) Of long-term bonds exceeded the standard deviation of small-company stocks.
C) Of large-company stocks exceeded the standard deviation of small-company stocks.
D) Of Treasury bills exceeded the standard deviation of long-term bonds.
E) Of Treasury bills was less than the standard deviation of large-company stocks.
Answer: E
244)
Which of the following is true?
A) On average, the greater the risk, the lower the reward.
B) If a market is not efficient, then all assets in that market will have the same reward to risk ratio.
C) When comparing the common stock of two firms, the riskier one will have the lower price.
D) Risky assets on average do not earn a risk premium.
E) There is a reward for bearing risk, on average.
Answer: E
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245)
The notion that actual capital markets, such as the TSX, are fairly priced is called the:
A) Open Markets Theorem.
B) Monopoly Pricing Theorem.
C) Law of One Price.
D) Laissez-Faire Axiom.
E) Efficient Markets Hypothesis (EMH).
Answer: E
246)
Treasury bills:
A) Are considered risk-free as they match or outperform inflation every year.
B) Outperformed inflation over the long-term as seen in the historical record for 1957-2005.
C) Outperformed inflation on an annual basis for every year during the period of 1957-2005.
D) Always yield an annual rate of return between 1 and 6%.
E) Usually generate a higher rate of return than long-term government bonds.
Answer: B
247)
Which of the following is implied by the evidence regarding market efficiency?
A) Prices don't respond rapidly to new information.
B) Insiders cannot make money from their private information.
C) Prices in well-organized capital markets are unfair.
D) There is a simple way to identify mispriced stocks when they exist.
E) It is difficult to predict future price movements based on public information.
Answer: E
248)
If capital markets are efficient, then ________.
A) it is not possible to make money by playing the stock market
B) historical price trends will give you a good idea of where prices are headed in the future
C) prices will adjust slowly when reacting to new information
D) there is no reason to believe that prices are too high or too low
E) it is possible to profit regularly from publicly available information
Answer: D
249)
For a stock that does not pay a dividend, the total return can also be defined as the:
A) Nominal after-tax rate of return.
B) Capital gains rate.
C) Risk premium plus the inflation rate.
D) Real rate of return.
E) Financial rate of return.
Answer: B
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250)
In an efficient market, the price of a security will:
A) Always rise immediately upon the release of new information with no further price adjustments
related to that information.
B) Rise sharply when new information is first released and then decline to a new stable level by
the following day.
C) Be slow to react for the first few hours after new information is released allowing time for that
information to be reviewed and analyzed.
D) React immediately to new information with no further price adjustments related to that
information.
E) React to new information over a two-day period after which time no further price adjustments
related to that information will occur.
Answer: D
251)
Which one of the following takes the shape of a bell curve?
A) frequency distribution
B) risk premium graph
C) variance
D) standard deviation
E) deviation of returns
Answer: A
252)
The nominal rate of return on large-company stocks consists of a:
A) Real rate of return plus the Treasury bill rate of return.
B) Risk premium plus the Treasury bill rate of return.
C) Risk-free rate of return plus an inflation adjustment.
D) Real risk-free rate of return plus a risk premium.
E) Risk-free rate of return plus a bond premium.
Answer: B
253)
The excess return you earn by moving from a relatively risk-free investment to a risky investment is
called the:
A) Geometric average return.
B) Time premium.
C) Arithmetic average return.
D) Inflation premium.
E) Risk premium.
Answer: E
254)
The risk premium of an asset is defined as the return on the asset in excess of the:
A) Current market rate of return.
B) Average return on the asset.
C) Average market rate of return.
D) Risk-free rate of return.
E) Rate of inflation.
Answer: D
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255)
An efficient capital market is one in which:
A) Security prices reflect available information.
B) Brokerage commissions are zero.
C) Taxes are irrelevant.
D) Security prices are guaranteed (by the Ontario Securities Commission) to be fair.
E) Securities always offer a positive rate of return to investors.
Answer: A
256)
Your best friend works in the finance office of the Delta Corporation. You are aware that this friend
trades Delta stock based on information he overhears in the office. You know that this information
is not known to the general public. Your friend continually brags to you about the profits he earns
trading Delta stock. Based on this information, you would tend to argue that the financial markets
are at best ________ form efficient.
A) weak
B) semi-weak
C) semi-strong
D) strong
E) perfect
Answer: C
257)
The U.S. Securities and Exchange Commission periodically charges individuals for insider trading
and claims those individuals have made unfair profits. Based on this fact, you would tend to argue
that the financial markets are at best ________ form efficient.
A) weak
B) semi-weak
C) semi-strong
D) strong
E) perfect
Answer: C
258)
If you excel in analyzing the future outlook of firms, you would prefer that the financial markets be
________ form efficient so that you can have an advantage in the marketplace.
A) weak
B) semi-weak
C) semi-strong
D) strong
E) perfect
Answer: A
259)
While eating in an exclusive restaurant in New York City, you overhear two executives negotiating
a merger. When you check the news about the two companies after lunch you find there is no public
information about any merger. Thus, you buy shares of stock in both firms and make a killing when
the merger is announced publicly two days later. This is a violation of ________ market efficiency.
A) weak form
B) semi-weak form
C) semi-strong form
D) strong form
E) TSX stock
Answer: D
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260)
Driving in your car, you hear that Microsoft has announced that they have cornered the market on
Internet technology. Knowing this is great news for Microsoft, when you arrive at a phone 30
minutes later you call your broker and are able to buy Microsoft stock before its price moves up on
the news. This is a violation of ________ market efficiency.
A) weak form
B) semi-weak form
C) semi-strong form
D) strong form
E) TSX stock
Answer: C
261)
You have discovered from looking at charts of past stock prices that if you buy just after a stock
price has declined for three consecutive days, you make money every time! This is a violation of
________ market efficiency.
A) weak form
B) semi-weak form
C) semi-strong form
D) strong form
E) TSX stock
Answer: A
262)
Which of the following is NOT correct about market efficiency?
A) Semi-strong form efficiency says all public and private information is reflected in stock prices.
B) The EMH says that actual capital markets, such as the TSX, are efficient.
C) Weak form efficiency says studying past prices in an attempt to identify mispriced stocks is
futile.
D) The price a firm obtains when it sells its stock in an efficient market is a fair price, in the sense
that the price reflects available information about the stock.
E) Strong form efficiency says all information of any kind is reflected in stock prices.
Answer: B
263)
The hypothesis that market prices reflect all historical information is called efficiency in the:
A) Open form.
B) Strong form.
C) Semi-strong form.
D) Weak form.
E) Stable form.
Answer: D
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264)
The hypothesis that market prices reflect all publicly-available information is called efficiency in
the:
A) Open form.
B) Strong form.
C) Semi-strong form.
D) Weak form.
E) Stable form.
Answer: C
265)
The hypothesis that market prices reflect all available information is called efficiency in the:
A) Open form.
B) Strong form.
C) Semi-strong form.
D) Weak form.
E) Stable form.
Answer: B
266)
Insider trading does not offer any advantages if the financial markets are:
A) Weak-form efficient.
B) Semi-strong-form efficient.
C) Semi-weak-form efficient.
D) Inefficient.
E) Strong-form efficient.
Answer: E
267)
Which of the following statements about market efficiency is generally considered to be true?
A) In the absence of legal constraints, investors with inside information will be able to earn excess
returns.
B) For inefficient markets, security prices will rapidly reflect new information.
C) It is easy to forecast the direction of future security price changes in the short run.
D) Short-run price changes occur independent of information coming to the market.
E) On average, most stocks are mispriced.
Answer: A
268)
Which one of the following is a correct ranking of securities based on their volatility over the period
of 1957 to 2005? Rank from highest to lowest.
A) Large company stocks, long-term bonds, Treasury bills.
B) Large company stocks, Treasury bills, long-term bonds.
C) Small company stocks, long-term bonds, large company stocks.
D) Small company stocks, Treasury bills, long-term bonds.
E) Long-term bonds, large company stocks, small company stocks.
Answer: A
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269)
Which of the following is generally considered to represent the risk-free return?
A) Common stocks.
B) Inflation.
C) Long bonds.
D) Treasury bills.
E) Small stocks.
Answer: D
270)
Which one of the following categories of securities has the highest average risk premium?
A) Canadian common stocks
B) Treasury bills
C) small-company stocks
D) long-term bonds
E) U.S. common stocks
Answer: C
271)
Which one of the following categories has the lowest positive, non-zero, risk premium?
A) U.S. large-company stocks
B) Long-term bonds
C) Canadian large-company stocks
D) Treasury bills
E) Small-company stocks
Answer: B
272)
The variance is defined as the:
A) Average difference between the average return and the actual return.
B) Squared difference between the rates of return from one year to that of the following year.
C) Average number of times an asset's rate of return falls within a specified range.
D) Average squared difference between the actual return and the average return.
E) Square of the average return minus the square of the actual return.
Answer: D
273)
The average squared difference between the actual return and the average return is the:
A) Variance.
B) Excess return.
C) Standard deviation.
D) Risk premium.
E) Average return.
Answer: A
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274)
You are an investor who studies the price movements of stock to identify patterns that are repetitive.
By doing this, you have been able to earn higher returns than normal. This would be a violation of:
A) The risk-return tradeoff.
B) The normal risk premium reward.
C) Strong form efficiency.
D) Weak form efficiency.
E) Semi-strong form efficiency.
Answer: D
275)
The risk premium is computed by ________ the average return for the investment.
A) subtracting the inflation rate from
B) subtracting the average return on Treasury bills from
C) adding the average return on Treasury bills to
D) adding the inflation rate to
E) subtracting the average return on long-term bonds from
Answer: B
276)
An efficient market implies ________.
A) that, on average, all investments have a zero NPV
B) that there tend to be more positive NPV investments than negative NPV investments
C) Nothing about the NPV of an investment
D) that, on average, all investments have a positive NPV
E) that, on average, all investments have a negative NPV
Answer: A
277)
Which of the following is the best definition for the concept of "standard deviation"?
A) The average squared deviation between the actual return and the average return.
B) The hypothesis is that actual capital markets are efficient.
C) Statistical measure of maximum loss used by banks and other financial institutions to manage
risk exposures.
D) The return earned in an average year over a multi-year period.
E) The positive square root of the variance.
Answer: E
278)
Which of the following is the best definition for the concept of "variance"?
A) The hypothesis is that actual capital markets are efficient.
B) The return earned in an average year over a multi-year period.
C) Statistical measure of maximum loss used by banks and other financial institutions to manage
risk exposures.
D) The average squared deviation between the actual return and the average return.
E) The positive square root of the variance.
Answer: D
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279)
Which of the following is the best definition for the concept of "value at risk" (VaR)?
A) The return earned in an average year over a multi-year period.
B) The hypothesis is that actual capital markets are efficient.
C) Statistical measure of maximum loss used by banks and other financial institutions to manage
risk exposures.
D) The positive square root of the variance.
E) The average squared deviation between the actual return and the average return.
Answer: C
280)
Which of the following is the best definition for the concept of "arithmetic average return"?
A) The return earned in an average year over a multi-year period.
B) Statistical measure of maximum loss used by banks and other financial institutions to manage
risk exposures.
C) The positive square root of the variance.
D) The average squared deviation between the actual return and the average return.
E) The hypothesis is that actual capital markets are efficient.
Answer: A
281)
Which of the following is the best definition for the concept of "efficient markets hypothesis"
(EMH)?
A) The hypothesis is that actual capital markets are efficient.
B) The return earned in an average year over a multi-year period.
C) The average squared deviation between the actual return and the average return.
D) The positive square root of the variance.
E) Statistical measure of maximum loss used by banks and other financial institutions to manage
risk exposures.
Answer: A
282)
The Zolo Co. just declared that they are increasing their annual dividend from $1.00 per share to
$1.25 per share. If the stock price remains constant, then:
A) The dividend yield will also remain constant.
B) The dividend yield will increase.
C) The capital gains yield will decrease.
D) The capital gains yield will increase.
E) Neither the capital gains yield nor the dividend yield will change.
Answer: B
283)
Which of the following is NOT correct with regards to the Efficient Markets Hypothesis?
A) The EMH suggests that markets in which prices fluctuate a great deal cannot be efficient.
B) The EMH suggests that the prices on the TSX are fair, on average.
C) The EMH refers to well-organized capital markets.
D) The EMH asserts that information has been "priced out" of stocks.
E) The EMH suggests that there are no positive NPV investments, on average.
Answer: A
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284)
Why do long-term government bonds have a risk premium?
A) They are virtually identical to long-term corporate bonds.
B) They are not default-free.
C) The government cannot easily raise tax money to repay the bonds.
D) Long-term government bonds don't have a risk premium.
E) The long time period to maturity.
Answer: E
285)
Which one of the following statements is correct concerning the historical standard deviations of
asset classes over the period 1957-2005?
A) The historical standard deviation of long-term corporate bonds is less than the standard
deviation of large-company stocks.
B) The standard deviation of small-company stocks is almost three times the average annual return
for those stocks.
C) The historical standard deviation of large-company stocks is greater than the standard deviation
of small-company stocks.
D) Long-term corporate bonds are more volatile than Canadian Treasury bills as shown by their
standard deviations.
E) The standard deviation of large-company stocks demonstrates they have more risk than any
other category.
Answer: D
286)
Which one of the following is a correct statement concerning risk premium?
A) The greater the volatility of returns, the greater the risk premium.
B) The lower the average rate of return, the greater the risk premium.
C) The lower the volatility of returns, the greater the risk premium.
D) The risk premium is not affected by the volatility of returns.
E) The risk premium is not correlated to the average rate of return.
Answer: A
287)
The standard deviation for a set of stock returns can be calculated as:
A) The positive square root of the average return.
B) The variance squared.
C) The positive square root of the variance.
D) The average squared difference between the actual return and the average return.
E) The average return divided by N minus one, where N is the number of returns.
Answer: C
288)
________ is one of the most commonly used measures of return volatility.
A) The normal distribution
B) The risk premium
C) Return on investment
D) The inflation rate
E) Standard deviation
Answer: E
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289)
In an efficient market:
A) Future price performance is easy to predict, especially for the short run.
B) Prices react quickly and correctly to new information.
C) Every investment in a security will yield a positive return.
D) Prices are constant over the short term.
E) The risk premium on all securities will diminish to zero.
Answer: B
290)
"Risk premium" is defined as:
A) The real rate of return that exceeds the risk-free rate of return.
B) The total return on a risky asset that exceeds the inflation rate.
C) The rate of return required by investors in risky assets.
D) The return on a risky asset that exceeds the return on a risk-free asset.
E) The risk-free rate of return plus the inflation rate.
Answer: D
291)
Assume that markets are semi-strong form efficient. Suppose, then, that during a trading day,
important new information is released for the first time concerning a certain company. This
information indicates that one of the firm's oil fields, previously thought to be very promising, just
came up dry. How would you expect the price of a share of stock to react to this information?
A) The value of a share will drop immediately to a price that reflects the value of the new
information.
B) The value of a share will fall below what is considered appropriate because of the decreased
demand for the shares, but eventually the price will rise to the correct level.
C) The value of a share will fall over an extended period of time as investors begin to sell shares
in the company.
D) The value of a share will rise over a long period of time as investors sell the stock.
E) The stock price will not change since this type of information has no impact in markets that are
semi-strong form efficient.
Answer: A
292)
The frequency distribution of large-company stocks since 1957 shows that:
A) These stocks return negative rates of return about half of the time.
B) These stocks have never produced a rate of return higher than 40% in any one year.
C) These stocks have never lost more than 20% of their value in any one year.
D) There is minimal risk in these stocks over the short-term.
E) These stocks tend to have a normal distribution around a positive mean over the long-term.
Answer: E
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293)
Suppose you purchase a stock expecting the price to rise in the coming year. After one year, your
stock has actually decreased in value, due primarily to adverse information released during the year.
Which of the following describes this result?
A) This is a violation of semi-strong form efficiency.
B) This is a violation of all forms of market efficiency.
C) This is a violation of strong form efficiency.
D) This is not a violation of market efficiency.
E) This is a violation of weak form efficiency.
Answer: D
294)
You discover that you can make greater than expected returns by buying stock in firms whenever the
growth rate in sales predicted by an investment survey exceeds the stock's current price-earnings
ratio. Which of the following describes this event?
A) This would be a violation of weak form efficiency.
B) This would be a violation of all forms of market efficiency.
C) This would not be a violation of market efficiency.
D) This would be a violation of strong form efficiency but not of semi-strong form efficiency.
E) This would be a violation of semi-strong form efficiency.
Answer: E
295)
You discover you can make above normal returns if you buy oil-company stocks just before noon on
any given trading day and then sell them immediately before the market closes that same day.
Which of the following describes this event?
A) This would be a violation of semi-strong form efficiency.
B) This would not be a violation of market efficiency.
C) This would be a violation of weak form efficiency.
D) This would be a violation of strong form efficiency.
E) This would be a violation of all forms of market efficiency.
Answer: C
296)
The variance is the:
A) Average risk premium over a period of time.
B) Average difference between the actual return and the average return.
C) Total of the squared deviations from the average.
D) Average of the squared deviations from the mean.
E) Positive square root of the standard deviation.
Answer: D
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297)
Over the past 50 years, which of the following Canadian investments has provided the largest
average return?
A) Canadian common stocks
B) Treasury bills
C) Long bonds
D) Inflation
E) Canadian small stocks
Answer: E
298)
Over the past 50 years, which of the following investments has provided the smallest average
return?
A) U.S. common stocks
B) Long bonds
C) Treasury bills
D) Canadian small stocks
E) Canadian common stocks
Answer: C
299)
Over the past 50 years, which of the following investments has been considered the most risky?
A) Treasury bills
B) Canadian common stocks
C) Canadian small stocks
D) Long bonds
E) U.S. common stocks
Answer: C
300)
Over the past 50 years, which of the following investments has been the least risky?
A) Canadian common stocks
B) Treasury bills
C) U.S. common stocks
D) Canadian small stocks
E) Long bonds
Answer: B
301)
Estimates using the arithmetic average will probably tend to ________ values over the long-term
while estimates using the geometric average will probably tend to ________ values over the
short-term.
A) overestimate; overestimate
B) underestimate; overestimate
C) overestimate; underestimate
D) underestimate; underestimate
E) accurately estimate; accurately estimate
Answer: C
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302)
Over the period of 1970-2005, small-company stocks:
A) Underperformed large-company stocks during some years while outperforming them over the
long term.
B) Were the least volatile.
C) Outperformed large-company stocks every year.
D) Always outperformed Treasury bills.
E) Underperformed large-company stocks during some years and also over the long term.
Answer: A
303)
The historical record demonstrates that the risk of loss decreases when the ________ increases.
A) Time horizon
B) Variance
C) Standard deviation
D) Volatility
E) Average return
Answer: A
304)
The average compound return earned per year over a multi-year period is called the ________
average return.
A) geometric
B) arithmetic
C) variant
D) standard
E) real
Answer: A
305)
The return earned in an average year over a multi-year period is called the ________ average return.
A) Arithmetic.
B) Real.
C) Geometric.
D) Standard.
E) Variant.
Answer: A
306)
If a company insider uses all of her knowledge about the company stock and still has no advantage
in the marketplace over outside investors, the market has to be:
A) Strong form efficient.
B) Overpriced.
C) Semi-strong form efficient.
D) Underpriced.
E) Weak form efficient.
Answer: A
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307)
Fred made the following rates of return on his portfolio over the past five years. The T-Bill rate and
the inflation rate for each year are also shown. Based on this information, in which year did Fred
have the highest real rate of return?
A) Year
1
B) Year
2
C) Year
3
D) Year
4
E) Year
5
Answer: E
308)
An asset's return on investment has two components, one of which is ________, which reflects the
cash you receive directly while you own the investment.
A) the capital gain
B) your total dollar return
C) the income component
D) your reward for bearing risk
E) your gross return on that investment
Answer: C
309)
An efficient market is defined as one where all investments in that market are ________
investments.
A) Positive real rate of return
B) Zero real rate of return
C) Zero net present value
D) Positive net present value
E) Zero risk premium
Answer: C
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SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
310)
Coming out of the depression, small stocks in the U.S. earned their highest one year historical return
of 143% in 1933. However, in the four years prior to that you would have lost (going from 1929 to
1932, in order) about 50%, 40%, 50%, and 5%. Suppose you started into this five year stretch with
$10,000 invested. How much did you still have heading into 1933? How much would you have at
the end of that year? Based on these numbers, do you think the 143% return should be included in
the return series?
Answer: This question gives students the chance to convert returns into values and to see the impact of
several years' losses on invested wealth. If you began with $10,000, your investment declines
(year-by-year) to $5,000, $3,000, $1,500, and $1,425. So, you begin 1933 with only $1,425
left. At the end of that year, you have $3,463, a far cry from your starting point of $10,000.
The astute student will point out that by the time the 143% return rolls around, the value of the
investment has declined so much that the large single return in 1933 still leaves you far behind
your initial investment. Small stocks are volatile and as such, you expect years of large losses
and large gains, therefore no single year's return should be left out simply because it appears to
be an outlier.
311)
There is a common saying among investment professionals that "past performance does not
guarantee future returns." If this statement is correct, then why is it important to understand the past
performance of various asset classes?
Answer: Student answers will vary. One general theme might be that history provides a basis for
comparison along with a general understanding of the risk-return tradeoff. Historical
performance also provides investors with some understanding of what they can reasonably
expect to earn. These expectations affect the prices investors are willing to pay, thereby
tending to keep the performance of an asset class within its historical averages.
312)
How can studying the historical record of our financial markets and inflation help you better prepare
financially for your future?
Answer: Student answers will vary but the question should get students thinking. The historical record
illustrates that both inflation and the return on any investment can be quite unpredictable over
the short-term. The record also illustrates that the state of the national economy as well as
world events play a major role in the performance of the markets. Understanding the past
performance of the markets should help students realize that nothing is guaranteed and that
they should be prepared for unexpected events and have a financial plan that is both flexible
and capable of withstanding market changes. This question can also be used as a lead into a
class discussion.
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313)
Suppose you have $30,000 invested in the stock market and your banker comes to you and tries to
get you to move that money into the bank's GICs. He explains that the GICs are 100% Government
insured and that you are taking unnecessary risks by being in the stock market. How would you
respond?
Answer: The usual response is that bank GICs typically will offer a very low rate of return because of
their low level of risk. Even if students do not know the relationship between yields on GICs
and historical returns on stocks, they should recognize that because of the risk differences the
GICs must have a lower expected return. So, if the investor in the question is willing to trade
off some safety in order to have the chance to earn larger returns, the stock market is the
correct investment.
314)
Retirees with limited income and small investment portfolios are generally perceived as facing a real
dilemma when it comes to investment risk and return. Explain this dilemma and what its
implications are for the retirees.
Answer: This question is designed to help students realize that higher rates of return also represent
higher possibilities of investment losses, especially in the short-term. While retirees may need
a high return, they cannot afford the short-term risk to their principal and therefore are
generally forced to accept lower returns.
315)
Provide a definition for the concept of "risk premium."
Answer: The excess return required from an investment in a risky asset over a risk-free investment.
316)
Provide a definition for the concept of "standard deviation."
Answer: The positive square root of the variance.
317)
Provide a definition for the concept of "variance."
Answer: The average squared deviation between the actual return and the average return.
318)
Provide a definition for the concept of "normal distribution."
Answer: A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard
deviation.
319)
Provide a definition for the concept of "value at risk" (VaR).
Answer: Statistical measure of maximum loss used by banks and other financial institutions to manage
risk exposures.
320)
Provide a definition for the concept of "efficient markets hypothesis" (EMH).
Answer: The hypothesis is that actual capital markets are efficient.
321)
Provide a definition for the concept of "efficient capital market."
Answer:
322)
Market in which security prices reflect available information.
Provide a definition for the concept of "arithmetic average return."
Answer: The return earned in an average year over a multi-year period.
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323)
Provide a definition for the concept of "geometric average return."
Answer: The average compound return earned per year over a multi-year period.
324)
What are the lessons learned from capital market history? What evidence is there to suggest these
lessons are correct?
Answer: First, there is a reward for bearing risk, and second, the greater the reward, the greater the risk.
As evidence, the students should provide a brief discussion of the historical rates of return and
standard deviation of returns of the various asset classes discussed in the text.
325)
Define the three forms of market efficiency.
Answer: The student should present a straightforward discussion of weak (all past prices are in the
current price), semi-strong (all public information is in the current price), and strong form (all
information is in the current price) market efficiency.
326)
Explain why it is that in an efficient market, investments have an expected NPV of zero.
Answer: In an efficient market, prices are "fair" so that the cost of an investment is neither too high nor
too low. Thus, on average, investments in that market will yield a zero NPV. Investors get
exactly what they pay for when they buy a security in an efficient market and firms get exactly
what their stocks and bonds are worth when they sell them.
327)
Do you think the lessons from capital market history will hold for each year in the future? That is, as
an example, if you buy small stocks will your investment always outperform Treasury bills?
Answer: The student should realize that we are working with averages, so they should not expect
riskier assets to always outperform less risky assets. The student should explain somewhere in
their answer that this gets to the heart of what risk is. That is, the reason you expect to earn a
higher return over the long haul is that your variability in price from year to year can be
significant.
328)
Suppose your cousin invests in the stock market and doubles her money in a single year while the
market, on average, earned a return of only about 15%. Is your cousin's performance a violation of
market efficiency?
Answer: No, market efficiency does not preclude investors from "beating the market." It is entirely
possible to earn higher returns than the market at times. However, if your cousin is able to do
so consistently, then there would certainly be some doubt cast upon market efficiency.
329)
How do you think the stock market would be affected if the laws were changed so that trading on
insider information was no longer illegal? What would be the impact on the goal of the financial
manager if such a change were to occur?
Answer: This open-ended question allows students to ponder market efficiency from a different angle.
By allowing insiders to trade on their information, it would be possible for insiders to take
advantage of uninformed investors. This may keep some investors out of the market because
they would perceive the prices observed as no longer being "fair." This change would provide
a serious blow to the efficiency of the market and would also further complicate the issue of
whose interest managers are working to satisfy.
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330)
Why should a financial decision maker such as a corporate treasurer or CFO be concerned with
market efficiency?
Answer: Good answers to this question might indicate that market efficiency is a necessary condition
for the "Maximize Shareholder Wealth" rule. Unless we are confident that the market price is
an economically meaningful number, seeking to maximize it is silly. Similarly, students
should recognize that there is a very strong link between managerial decisions and the value of
the firm, as reflected in security prices. Finally, as a preview of the cost of capital discussion
in later chapters, instructors might point out that market efficiency ensures that the required
returns on new securities will be directly related to the risk-return profile of the firm (and,
therefore, to managerial actions).
331)
The Government has insider trading laws which punish individuals who trade in the securities
markets using information that is not publicly known. Explain how these laws might affect the
degree of market efficiency that currently exists in our capital markets.
Answer: Student answers will vary but should illustrate an understanding of the difference between
semi-strong form efficiency and strong form market efficiency. An argument can be made that
the insider trading laws prevent our markets from being strong form efficient. An argument
can also be made that even though insider trading laws exist, the odds of being caught might
be slim, and thus some insider trading exists. If this is so, then our markets are somewhere
between semi-strong and strong form efficient.
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