Lessons For Capital Market History

FIN 3200

Homework 5 – Chapter 12 – Lessons for Capital Market History

Date

1) Last year, T-bills had a return of 4 % while an investment in large-company stocks returned an average of 9%. Which of the terms below refers to the difference between these two rates of return?

A) Arithmetic

B) Standard deviation

C) Variance

D) Risk premium

E) Geometric return

2) Which of the following does standard deviation measure?

A) Probability

B) Volatility

C) Real returns

D) Average rate of return

E) Risk premium

3) The average compound return earned per year over a multiyear period is called the ________ average return.

A) Variant

B) Real

C) Standard

D) Arithmetic

E) Geometric

4) The ______ average return, is the return earned in an average year over a multiyear period.

A) Real

B) Arithmetic

C) Standard

D) Variant

E) Geometric

5) Colette bought a stock last year and sold it today for $8 a share more than her purchase price. Over that time, she received $1.50 in dividends. Which one of the statements below is correct regarding this investment?

A) The capital gains yield is positive.

B) The dividend yield is greater than the capital gains yield.

C) The dividend yield is expressed as a percentage of the selling price.

D) The total dollar return per share is $8.

E) The capital gain would have been less had Colette not received the dividends.

6) If we assume the inflation rate is positive, a security’s real rate of return will be ________ the nominal rate of return.

A) Greater than or equal to.

B) Equal to.

C) Less than.

D) Greater than.

E) Unrelated to.

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

A) National deflation occurred at least once every decade during the period.

B) U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period.

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

D) Long-term government bonds outperformed U.S. Treasury bills every year during the period.

E) Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period.

8) According to the text and the graphs we studied in class, which of the types of securities below had the highest average return for the period 1926-2013?

A) Small company stocks

B) U.S. Treasury bills

C) Long-term corporate bonds

D) Long-term government bonds

E) Large-company stocks

9) Which one of these had the lowest average risk premium for 1926-2013?

A) Long-term government bonds

B) Small company stocks

C) Long-term corporate bonds

D) U.S. Treasury bills

E) Large company stocks

10) The highest risk premium was seen in which of these security categories for 1926-2013?

A) Long-term corporate bonds

B) U.S. Treasury bills

C) Large-company stocks

D) Long-term government bonds

E) Small-company stocks

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

A) Long-term corporate bonds

B) Intermediate-term government bonds

C) Inflation

D) U.S. Treasury bills

E) Large-company stocks

12) Efficient financial markets go up and down all the time. This happens because:

A) Current trading systems require human intervention.

B) Investments produce varying levels of net present values.

C) The markets are continually reacting to new information.

D) Arbitrage trading is limited.

E) The markets are continually reacting to old information as that information is absorbed.

13) Individual investors who continually monitor the financial markets looking for mispriced securities:

A) Are always quite successful using only historical price information as their basis of evaluation.

B) Can never find a mispriced security.

C) Make profits on all of their investments.

D) Are unusually successful in earning outsized profits.

E) Make the markets increasingly more efficient.

14) One year ago, you bought a stock for $32.25. The stock pays quarterly dividends of $.80 per share. Today, the stock is selling for $33.09 per share. What is your capital gain on this investment?

A) $1.24 B) $1.14 C) $.94 D) $1.04 E) $.84

15) One year ago, you purchased 400 shares of Romy’s Roses stock at a price of $24.15a share. The stock pays an annual dividend of $1.82 per share. Today, you sold all of your shares for $29.20 per share. What is your total dollar return on this investment?

A) $3,142 B) $1,356 C) $728 D) $2,020 E) $2,748

16) You just sold 1,300 shares of stock at a price of $43.85 a share. You purchased the stock for $39.86 a share and have received total dividends of $2,346. What is the total capital gain on this investment?

A) -$3,821 B) -$2,346 C) $5,187 D) $4,972 E) $7,533

17) What is the risk premium on a U.S. Treasury bill if the risk-free rate is 3.7 percent and the market rate of return is 10.1 percent?

A) 0 percent

B) 3.7 percent

C) 10.1 percent

D) 6.4 percent

E) -6.4 percent

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

A) 15.52 percent

B) 10.21 percent

C) 11.68 percent

D) 18.74 percent

E) 13.49 percent