Chapter 14
Multiple-Choice Questions
and
Answers
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1. Which of the following can never be negative?
(a)
(b)
(c)
(d)
The real rate of interest
The realized rate of return on a bond
The holding period return on a stock
The standard deviation on the rate of return
on a stock
(e) The correlation coefficient between two
stocks
The answer is (d).
© Captus Press Inc., 2012
2. If the stock market is efficient, it implies
_______.
(a) one cannot outperform the market
consistently
(b) stocks are fairly valued at any point in time
(c) the best investment strategy is to buy and
hold
(d) (a) and (b) only
(e) (a), (b), and (c)
The answer is (e).
© Captus Press Inc., 2012
3. The risk and return trade-off implies _______.
(a)
(b)
(c)
(d)
(e)
the higher the risk of an investment, the higher the
expected return
the lower the default risk on a bond, the higher the
holding period return
it is impossible to get rich in the stock market
that one must diversify to reduce risk
none of the above
The answer is (a).
© Captus Press Inc., 2012
The following information applies to
questions 4 and 5.
Lisa Sadowska purchased 100 shares of
AMB Inc. one year ago. She paid $11 per
share and, at the time of purchase, she
expected the company would pay a dividend
of 50 cents per share and that the stock price
would increase to $13 after one year. The
actual dividend paid was 40 cents per share,
and she just sold her stocks for $11.50 per
share.
© Captus Press Inc., 2012
4. The expected rate of return on the stock was
_______.
(a)
(b)
(c)
(d)
(e)
8.18%
22.73%
18.18%
21.82%
4.55%
The answer is (b).
© Captus Press Inc., 2012
Why?
E(P1 )  P0  E(D1 )
E(r ) 
P0
13  11  .50

11
 .2273
© Captus Press Inc., 2012
5. The realized rate of return was _______.
(a)
(b)
(c)
(d)
(e)
8.18%
3.48%
22.73%
20.87%
17.27%
The answer is (a).
© Captus Press Inc., 2012
Why?
P1  P0  D1
r
P0
11.5  11  .40

11
 .818
© Captus Press Inc., 2012