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Fiddler's Music Stores' stock has a risk premium of 8.3 percent while the inflation rate is 3.1 percent and the
risk-free rate is 3.8 percent. What is the expected return on this stock?
 
a. 13.7 percent
b. 6.9 percent
c. 15.2 percent
d. 9.0 percent
e. 12.1 percent
 
Expected return = .038 + .083 = .121, or 12.1 percent
  The security market line is defined as a positively sloped straight line that displays the relationship between the:
a. expected return and beta of either a security or a portfolio.
b. risk premium and beta of a portfolio.
c. beta and standard deviation of a portfolio.
d. systematic and unsystematic risks of a security.
e. nominal and real rates of return.
   
Which one of the following represents the amount of compensation an investor should expect to receive for
accepting the unsystematic risk associated with an individual security?
 
a. Risk-free rate of return
b. Security beta multiplied by the market risk premium
c. Market risk premium
d. Security beta multiplied by the market rate of return
e. Zero
   
If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____.
 
a. less; correctly priced
b. less; underpriced
c. less; overpriced
d. more; underpriced
e. more; overpriced
   
The slope of the security market line represents the:
 
a. beta coefficient.
b. risk premium on an individual asset.
c. market rate of return.
d. risk-free rate.
e. market risk premium.
   
Standard deviation measures _____ risk while beta measures _____ risk.
 
a. asset-specific; market
b. unsystematic; systematic
c. total; systematic
d. systematic; unsystematic
e. total; unsystematic
   
You bought a share of 7.5 percent preferred stock for $91.60 last year. The market price for your stock is now $89.10.
What is your total return to date on this investment?
 
5.46 percent
6.10 percent
5.86 percent
5.51 percent
4.73 percent
 
(Current price - base price + dividend yield) /   base price
(89.10 - 91.60 + 7.50) / 91.60    = 5.4585 which approx. to 5.46%
   
Which one of the following has the narrowest distribution of returns for the period 1926-2014?
 
Large-company stocks
Long-term government bonds
Long-term corporate bonds
Intermediate-term government bonds
Small-company stocks
   
Which one of the following is the best example of unsystematic risk?
 
a. Decrease in the value of the dollar
b. Inflation exceeding market expectations
c. Increase in consumer spending
d. A warehouse fire
e. Decrease in corporate tax rates
   
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock.
Which one of the following best describes the 16.5 percent rate?
 
a. Expected return
b. Real return
c. Systematic return
d. Risk premium
e. Market rate
   
Which one of the following statements is correct?
 
a. There is an inverse relationship between the level of risk and the risk premium given a risky security.
b. If a risky security is correctly priced, its expected risk premium will be positive.
c. The risk premium on a risk-free security is generally considered to be one percent.
d. If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.
e. The expected rate of return on any security, given multiple states of the economy, must be positive.
   
Unsystematic risk can be defined by all of the following except:
 
a. unrewarded risk.
b. unique risk.
c. market risk.
d. diversifiable risk.
e. asset-specific risk.
   
Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock
with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk
than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?
 
a. Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
b. Invest the entire $5,000 in a stock with a beta of 1.0
c. Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0
d. Invest $2,000 in a stock with a beta of 3, $2,000 in a risk-free asset, and $1,000 in a stock with a beta of 1.0
e. Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in a stock with a beta of 2.0
   
The average risk premium on long-term government bonds for the period 1926-2014 was equal to:
 
the rate of return on the bonds minus the inflation rate.
1 percent.
the rate of return on the bonds plus the corporate bond rate.
the rate of return on the bonds minus the T-bill rate
zero.
   
The common stock of Mountain Farms has yielded 14.2 percent, 11.7 percent, 3.4 percent, -2.8 percent, and 15.8
percent over the past five years, respectively. What is the geometric average return?
 
7.91 percent
7.64 percent
8.22 percent
8.27 percent
8.03 percent
 
Geometric Average Return = [(1 + 14.20%) × (1 + 11.70%) × (1 + 3.40%) × (1 - 2.80%) × (1 + 15.80%)] ^ (1 / 5) - 1
= (1.4846^0.20) - 1
= 1.0822 - 1
= 8.22%
Geometric Average return on stock is 8.22%.
   
One year ago, you purchased 600 shares of stock for $14 a share. The stock pays $.41 a share in dividends
each year. Today, you sold your shares for $15.30 a share. What is your total dollar return on this investment?
 
$1,222
$815
$1,026
$780
$7,43
 
600 x 15.3 - 600 x 14 + 600 x 0.41 = 1026
   
Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 3.2 percent when the stock
was selling for $35a share. What is the current price of the stock if the current dividend yield is 2.9 percent?
 
$26.87
$18.92
$27.40
$38.62
$25.20
 
Dividend yield = Annual dividend/Stock price
3.20% = annual dividend/$35
Annual dividend = $1.12
2.90% = $1.12/Stock price
Stock price = $38.62
   
Based on the period 1926-2014, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?
 
Between 0 and 1 percent
Between 4 and 5 percent
Between 3 and 4 percent
Between 1 and 2 percent
Between 2 and 3 percent
   
Sarah earned a 3.3 percent real rate of return on her investments for the past year.
During that time, the risk-free rate was 3.6 percent and the inflation rate was 3.1 percent.
What was her nominal rate of return?
 
6.50 percent
5.30 percent
6.91 percent
6.67 percent
6.06 percent
 
Explanation
Real interest rate = (1+Nominal Interest rate/1+Inflation Rate) - 1
3.30 per cent = (1+ Nominal Interest Rate/ 1+3.1 per cent) - 1
0.033 = (1+ Nominal interest rate/ 1+0.031)-1
1.033 = 1+ Nominal interest rate/ 1.031
1.065023 = 1 + Nominal Interest rate
1.065023 - 1 = Nominal Interest Rate
0.065023 = Nominal Interest Rate
Nominal Interest Rate = 6.50% (approx)
   
The stock of Southern United is priced at $52 a share and has a dividend yield of 3.6 percent.
The firm pays constant annual dividends. What is the amount of the next dividend per share?
 
$1.872
$1.724
$1.729
$1.826
$1.878
 
.036 x 52 = 1.872
   
The variance is the average squared difference between which of the following?
 
Actual return and average return
Actual return and (average return/N - 1)
Actual return and the real return
Average return and the standard deviation
Actual return and the risk-free rate
   
Which one of the following is the positive square root of the variance?
 
Standard deviation
Mean
Risk-free rate
Average return
Real return
   
Which one of the following is defined as a bell-shaped frequency distribution that is defined by
its average and its standard deviation?
 
Arithmetic average return
Variance
Standard deviation
Probability curve
Normal distribution
   
Which one of the following best describes an arithmetic average return?
 
Total return divided by N - 1, where N equals the number of individual returns
Average compound return earned per year over a multiyear period
Total compound return divided by the number of individual returns
Return earned in an average year over a multiyear period
Positive square root of the average compound return
   
An efficient capital market is best defined as a market in which security prices reflect which one of the following?
 
Current inflation
A risk premium
All available information
The historical arithmetic rate of return
The historical geometric rate of return
   
Which one of the following is the hypothesis that securities markets are efficient?
 
Geometric market hypothesis
Standard deviation hypothesis
Efficient markets hypothesis
Capital market hypothesis
Financial markets hypothesis
   
Which one of the following combinations will always result in an increased dividend yield?
 
Increase in the stock price combined with a lower dividend amount
Increase in the stock price combined with a higher dividend amount
Decrease in the stock price combined with a lower dividend amount
Decrease in the stock price combined with a higher dividend amount
Increase in the stock price combined with a constant dividend amount
   
Which one of the following could cause the total return on an investment to be a negative rate?
 
Constant annual dividend amount
Increase in the annual dividend amount
Stock price that remains constant over the investment period
Stock price that declines over the investment period
Stock price that increases over the investment period
   
Which answer creates a false sentence? Percentage returns:
 
relay information about a security more easily than dollar returns do.
are not affected by the amount of the investment.
can be easily separated into dividend yields and capital gain yields.
are easy to understand.
are difficult to compute.
   
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook,
are based on the:
 
largest 20 percent of the stocks traded on the NYSE.
stock returns for the largest 10 percent of the publicly traded firms in
the U.S.
returns of the 100 largest firms in the U.S.
returns of all the stocks listed on the NYSE.
stocks of the 500 companies included in the S&P 500 index.
   
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns?
 
Large-company stocks
U.S. Treasury bills
Small-company stocks
Long-term corporate bonds
Long-term government bonds
   
Over the period of 1926-2014:
 
long-term government bonds underperformed long-term corporate bonds.
small-company stocks underperformed large-company stocks.
inflation exceeded the rate of return on U.S. Treasury bills.
U.S. Treasury bills outperformed long-term government bonds.
large-company stocks outperformed all other investment categories.
   
The rate of return on which one of the following has a risk premium of 0%?
 
Long-term government bonds
Long-term corporate bonds
Intermediate-term government bonds
U.S. Treasury bills
Large-company stocks
   
Which one of the following had a zero-standard deviation of returns for the period of 1926-2014?
 
All of the listed security types had a standard deviation of returns in excess of zero percent.
U.S. Treasury bills
Long-term corporate bonds
Large-company stocks
Long-term government bonds
   
Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014?
 
Small-company stocks
U.S. Treasury bills
Long-term government bonds
Inflation
Large-company stock
   
The period 1926-2014 illustrates that U.S. Treasury bills:
 
outperform inflation by approximately 1 percent every year.
have a zero standard deviation.
can either outperform or underperform inflation on an annual basis.
produce a rate of return roughly equivalent to the rate of return on long-term government bonds.
routinely have negative annual returns.
   
The historical record for the period 1926-2014shows that the annual nominal rate of return on:
 
risk-free securities has averaged around 5 percent.
the Consumer Price Index has been positive every year.
U.S. Treasury bills have had a positive rate of return for every year in the period.
U.S. Treasury bills is constant.
large company stocks has averaged around 9 percent.
   
What was the average annual risk premium on small-company stocks for the period 1926-2014?
 
12.3 percent
11.2 percent
12.9 percent
13.2 percent
13.5 percent
   
Which one of the following statements is true regarding the period 1926-2014?
 
The returns on small-company stocks were less volatile than the returns on large-company stocks.
The risk-free rate of return remained constant over the time period.
U.S. Treasury bills had a positive average real rate of return.
Bonds had an average rate of return that exceeded the average return on stocks.
The inflation rate was just as volatile as the return on long-term bonds.
U.S. Treasury bills had a positive average real rate of return.
   
For the period 1926-2014, which one of the following had the smallest risk premium?
 
Large-company stocks
Small-company stocks
Long-term corporate bonds
U.S. Treasury bills
Long-term government bonds
   
Which one of the following statements is correct?
 
The risk-free rate of return has a risk premium of 1.0.
The reward for bearing risk is called the standard deviation.
Risks and expected return are inversely related.
The higher the expected rate of return, the wider the distribution of returns.
Risk premiums are inversely related to the standard deviation of returns.
   
Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2014?
 
U.S. Treasury bills
Large-company stocks
Long-term government debt
Small-company stocks
Long-term corporate debt
   
The average risk premium on long-term government bonds for the period 1926-2014 was equal to:
 
zero.
1 percent.
the rate of return on the bonds plus the corporate bond rate.
the rate of return on the bonds minus the T-bill rate.
the rate of return on the bonds minus the inflation rate.
   
The standard deviation measures the _____ of a security's returns over time.
 
average value
frequency
volatility
mean
arithmetic average
   
Which one of the following has the narrowest distribution of returns for the period 1926-2014?
 
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
Large-company stocks
Small-company stocks
   
What is the probability associated with a return that lies in the upper
tail when the mean plus two standard deviations is graphed?
.05 percent
.5 percent
1.0 percent
2.5 percent
5.0 percent
   
When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?
 
When the set of returns includes only risk-free rates
When the set of returns has a wide frequency distribution
When the set of returns has a very narrow frequency distribution
When all of the rates of return in the set of returns are equal to each
other
Never
   
Assume the securities markets are strong form efficient.
Given this assumption, you should expect which one of the following to occur?
 
The risk premium on any security in that market will be zero.
The price of any one security in that market will remain constant at its current level.
Each security in the market will have an annual rate of return equal to the risk-free rate.
The price of each security in that market will frequently fluctuate.
The prices of each security will fall to zero because the net present value of the investments will be zero.
   
New Labs just announced that it has received a patent for a product that will eliminate all flu viruses.
This news is totally unexpected and viewed as a major medical advancement.
Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?
 
The price of New Labs stock remains unchanged.
The price of New Labs stock increases rapidly and then settles back to its pre-announcement level.
The price of New Labs stock increases rapidly to a higher price and then remains at that price.
All stocks quickly increase in value and then all but New Labs stock fall back to their original values.
The value of all stocks suddenly increase and then level off at their higher values.
   
According to the efficient markets hypothesis, professional investors will earn:
 
excess profits over the long-term.
excess profits, but only on short-term investments.
a dollar return equal to the value paid for an investment.
a return that cannot be accurately predicted because investments are
subject to the random movements of the markets.
a return that "beats the market."
   
Semistrong form market efficiency states that the value of a security is based on:
 
all public and private information.
historical information only.
all publicly available information.
all publicly available information plus any data that can be gathered from insider trading.
random information with no clear distinction as to the source of that information.
   
Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the
knowledge he has related to his experiments if the financial markets are:
 
weak form efficient.
strong form efficient.
semi strong form efficient.
efficient at any level.
aware that the trader is an insider.
   
If the financial markets are semi strong form efficient, then:
 
only the most talented analysts can determine the true value of a security.
only individuals with private information have a marketplace advantage.
technical analysis provides the best tool to use to gain a marketplace advantage.
no one individual has an advantage in the marketplace.
every security offers the same rate of return.
   
One year ago, you purchased 600 shares of stock for $14 a share. The stock pays $.41 a share in dividends each year.
Today, you sold your shares for $15.30 a share. What is your total dollar return on this investment?
 
$1,222
$7,43
$815
$780
$1,026
 
Total dollar return = 600 × ($15.30 -14 + .41) = $1,026
   
One year ago, you purchased a 6 percent coupon bond with a face value of $1,000 when it was selling for 98.6 percent of par.
Today, you sold this bond for 101.2 percent of par. What is your total dollar return on this investment?
 
$86
$60
$64
$74
$82
 
Total dollar return = (1.012 ×$1,000) - (.986 ×$1,000) + (.06 ×$1,000) = $86
   
Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 3.2 percent when
the stock was selling for $35 a share. What is the current price of the stock if the current dividend yield is 2.9 percent?
 
$18.92
$38.62
$25.20
$26.87
$27.40
 
D = .032 ×$35 = $1.12
P0 = $1.12/.029 = $38.62
   
The Bermuda Triangle Store pays a constant dividend.
Last year, the dividend yield was 4.0 percent when the stock was selling for $16 a share.
What must the stock price be today if the market currently requires a 4.3 percent dividend yield on this stock?
 
$14.88
$12.30
$15.59
$19.22
$12.48
 
D = .040 ×$16 = $.64
P0 = $.64/.043 = $14.88
   
The stock of Southern United is priced at $52 a share and has a dividend yield of 3.6 percent.
The firm pays constant annual dividends. What is the amount of the next dividend per share?
 
$1.826
$1.729
$1.872
$1.878
$1.724
   
One year ago, you bought a stock for $29.15 a share. You received a dividend of $1.04 per share last month and sold the stock today for
$28.80 a share. What is the capital gains yield on this investment?
 
2.37 percent
1.76 percent
-1.20 percent
-1.62 percent
.53 percent
 
Capital gains yield = ($28.80-29.15)/$29.15 = -.0120, or -1.20 percent
   
Hercules Movers pays a constant annual dividend of $1.48 per share on its stock.
Last year at this time, the market rate of return on this stock was 15.7 percent.
Today, the market rate has fallen to 13.3 percent.
What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?
 
-15.29 percent
-22.03 percent
8.16 percent
16.47 percent
18.05 percent
 
Capital gains yield = [($1.48 / .133) -($1.48 / .157)]/($1.48 / .157) =
.1805, or 18.05 percent
   
One year ago, Debra purchased 5,400 shares of KNF stock for $218,056. Today, she sold those shares for $19.49 a share.
What is the capital gains yield on this investment if the dividend yield is 1.7 percent?
 
-28.01 percent
-48.82 percent
3.07 percent
-51.73 percent
4.53 percent
 
Capital gains yield = [$19.49-($218,056 / 5,400)]/($218,056 / 5,400) =
-.5173, or -51.73 percent
   
The variance is the average squared difference between which of the following?
 
Actual return and average return
   
Which one of the following is the positive square root of the variance?
 
Standard deviation
   
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average
and its standard deviation?
 
Normal distribution
   
Which one of the following best describes an arithmetic average return?
 
Return earned in an average year over a multiyear period
   
An efficient capital market is best defined as a market in which security prices reflect which one of the following?
 
All available information
   
Which one of the following is the hypothesis that securities markets are efficient?
 
Efficient markets hypothesis
   
Which one of the following combinations will always result in an increased dividend yield?
 
Decrease in the stock price combined with a higher dividend amount
   
Which one of the following could cause the total return on an investment to be a negative rate?
 
Stock price that declines over the investment period
   
Which one of the following statements is correct concerning both the dollar return and the percentage return
on a stock investment?
 
Without the size of an investment, the dollar return has less value than the percentage return.
   
Which answer creates a false sentence? Percentage returns:
 
are difficult to compute.
   
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in
your textbook, are based on the:
 
stocks of the 500 companies included in the S&P 500 index.
   
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns?
 
Small-company stocks
   
Over the period of 1926-2014:
 
long-term government bonds underperformed long-term corporate bonds.
   
The rate of return on which one of the following has a risk premium of 0%?
 
U.S. Treasury bills
   
Which one of the following had a zero standard deviation of returns for the period of 1926-2014?
 
excess of zero percent.
   
Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014?
 
Small-company stocks
   
The period 1926-2014 illustrates that U.S. Treasury bills:
 
can either outperform or underperform inflation on an annual basis.
   
The historical record for the period 1926-2014shows that the annual nominal rate of return on:
 
U.S. Treasury bills have had a positive rate of return for every year in the period.
   
What was the average annual risk premium on small-company stocks for the period 1926-2014?
 
13.2 percent
   
Based on the period 1926-2014, what rate of return should you expect to earn over the long-term if you are
unwilling to bear risk?
 
Between 3 and 4 percent
   
Which one of the following statements is true regarding the period 1926-2014?
 
U.S. Treasury bills had a positive average real rate of return.
   
For the period 1926-2014, which one of the following had the smallest risk premium?
 
U.S. Treasury bills
   
Which one of the following statements is correct?
 
The higher the expected rate of return, the wider the distribution of returns.
   
Which one of the following is the most apt to have the largest risk premium in the future based on the historical
record for 1926-2014?
 
Small-company stocks
   
The average risk premium on long-term government bonds for the period 1926-2014 was equal to:
 
the rate of return on the bonds minus the T-bill rate.
   
The standard deviation measures the _____ of a security's returns over time.
 
volatility
   
Which one of the following has the narrowest distribution of returns for the period 1926-2014?
 
Intermediate-term government bonds
   
What is the probability associated with a return that lies in the upper tail when the mean plus two standard
deviations is graphed?
 
2.5 percent
   
When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?
 
Never
   
Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the
following to occur?
 
The price of each security in that market will frequently fluctuate.
   
New Labs just announced that it has received a patent for a product that will eliminate all flu viruses.
This news is totally unexpected and viewed as a major medical advancement.
Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?
 
The price of New Labs stock increases rapidly to a higher price and then remains at that price.
   
According to the efficient markets hypothesis, professional investors will earn:
 
a dollar return equal to the value paid for an investment.
   
Semistrong form market efficiency states that the value of a security is based on:
 
all publicly available information.
   
Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the
knowledge he has related to his experiments if the financial markets are:
 
strong form efficient.
   
If the financial markets are semistrong form efficient, then:
 
only individuals with private information have a marketplace advantage.
   
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the
 
Beta Coefficient
   
Standard Deviation measures____risk while beta measures ____ risk.
 
Total Systematic
   
One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total
return of 3.1 percent. Given this information, you know for sure the
 
sum of the dividend yield and the capital gains yield is 3.1 percent.
   
The lower the standard deviation of returns on a security, the _____ the expected rate of return and the______the risk.
 
lower; lower

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