CHAPTER 12
HISTORICAL RECORD
b 26. $1 invested in U.S. Treasury bills in 1926 would have increased in value to ____ by
2003.
a. $10 b. $17 c. $30 d. $43 e. $60
HISTORICAL RECORD
d 27. Which one of the following is a correct ranking of securities based on their volatility
over the period of 1926 to 2003? Rank from highest to lowest.
a. large company stocks, U.S. Treasury bills, long-term government bonds b. small company stocks, long-term corporate bonds, large company stocks c. small company stocks, long-term government bonds, long-term corporate bonds d. large company stocks, long-term corporate bonds, long-term government bonds e. long-term government bonds, long-term corporate bonds, U.S. Treasury bills
HISTORICAL RECORD
d 28. $1 invested in small company stocks in 1926 would have increased in value to _____
by 2003.
a. $60 b. $2,284 c. $4,092 d. $10,953 e. $13,185
HISTORICAL RECORD
d 29. The highest rate of annual inflation between 1926 and 2003 was_____ percent. a. 7 b. 10 c. 13 d. 18 e. 22
HISTORICAL RECORD
e 30. The annual return on long-term government bonds has ranged between _____ percent
and _____ percent during the period 1926 to 2003.
a. -2; 8 b. -4; 6 c. -5; 10 d. -6; 29 e. -7; 44
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HISTORICAL RECORD
e 31. Over the period of 1926 to 2003, small company stocks had an average return of _____
percent.
a. 8.8 b. 10.2 c. 12.4 d. 14.6 e. 17.5
HISTORICAL AVERAGE RETURNS
c 32. Over the period of 1926 to 2003, the average rate of inflation was _____ percent. a. 2.0 b. 2.7 c. 3.1 d. 3.8 e. 4.3
HISTORICAL AVERAGE RETURNS
c 33. The average annual return on long-term corporate bonds for the period of 1926 to 2003
was _____ percent.
a. 3.8 b. 5.8 c. 6.2 d. 7.9 e. 8.4
AVERAGE RETURNS
b 34. The average annual return on small company stocks was about _____ percent greater
than the average annual return on large-company stocks over the period of 1926 to 2003.
a. 3 b. 5 c. 7 d. 9 e. 11
RISK PREMIUM
a 35. The average risk premium on U.S. Treasury bills over the period of 1926 to 2003 was
_____ percent.
a. 0.0 b. 1.6 c. 2.2 d. 3.1 e. 3.8
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RISK PREMIUM
a 36. 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 volatility of returns, the greater the risk premium. c. The lower the average rate of return, the greater the risk premium. d. The risk premium is not correlated to the average rate of return. e. The risk premium is not affected by the volatility of returns.
RISK PREMIUM
c 37. The risk premium is computed by ______ the average return for the investment. a. subtracting the inflation rate from b. adding the inflation rate to c. subtracting the average return on the U.S. Treasury bill from d. adding the average return on the U.S. Treasury bill to e. subtracting the average return on long-term government bonds from
RISK PREMIUM
c 38. 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. inflation premium. c. risk premium. d. time premium. e. arithmetic average return.
RISK PREMIUM
b 39. To convince investors to accept greater volatility in the annual rate of return on an
investment, you must:
a. decrease the risk premium. b. increase the risk premium. c. decrease the expected rate of return. d. decrease the risk-free rate of return. e. increase the risk-free rate of return.
FREQUENCY DISTRIBUTION
a 40. Which one of the following takes the shape of a bell curve? a. frequency distribution b. variance c. risk premium graph d. standard deviation e. deviation of returns
CHAPTER 12
VARIANCE
e 41. Which of the following statements are correct concerning the variance of the annual
returns on an investment?
I. The larger the variance, the more the actual returns tend to differ from the average
return.
II. The larger the variance, the larger the standard deviation. III. The larger the variance, the greater the risk of the investment. IV. The larger the variance, the higher the expected return. a. I and III only b. II, III, and IV only c. I, III, and IV only d. I, II, and III only e. I, II, III, and IV
VARIANCE
a 42. 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. average returns by the number of returns plus one. d. squared deviations by the average rate of return. e. squared deviations by the number of returns plus one.
STANDARD DEVIATION
b 43. Which of the following statements concerning the standard deviation are correct? I. The greater the standard deviation, the lower the risk. II. The standard deviation is a measure of volatility. III. The higher the standard deviation, the less certain the rate of return in any one given
year.
IV. The higher the standard deviation, the higher the expected return. a. I and III only b. II, III, and IV only c. I, III, and IV only d. I, II, and III only e. I, II, III, and IV
STANDARD DEVIATION
a 44. The standard deviation on small company stocks: I. is greater than the standard deviation on large company stocks. II. is less than the standard deviation on large company stocks. III. had an average value of about 33 percent for the period 1926 to 2003. IV. had an average value of about 20 percent for the period 1926 to 2003. a. I and III only b. I and II only c. II and III only d. II and IV only e. I and IV only
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ARITHMETIC VS. GEOMETRIC AVERAGES
b 45. 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. overestimate; underestimate c. underestimate; overestimate d. underestimate; underestimate e. accurately; accurately
MARKET EFFICIENCY
d 46. 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. react to new information over a two-day period after which time no further price
adjustments related to that information will occur.
c. rise sharply when new information is first released and then decline to a new stable
level by the following day.
d. react immediately to new information with no further price adjustments related to that
information.
e. be slow to react for the first few hours after new information is released allowing time
for that information to be reviewed and analyzed.
MARKET EFFICIENCY
c 47. If the financial markets are efficient, then investors should expect their investments in
those markets to:
a. earn extraordinary returns on a routine basis. b. generally have positive net present values. c. generally have zero net present values. d. produce arbitrage opportunities on a routine basis. e. produce negative returns on a routine basis.
MARKET EFFICIENCY
d 48. Which one of the following statements is correct concerning market efficiency? a. Real asset markets are more efficient than financial markets. b. If a market is efficient, arbitrage opportunities should be common. c. In an efficient market, some market participants will have an advantage over others. d. A firm will generally receive a fair price when it sells shares of stock. e. New information will gradually be reflected in a stock’s price to avoid any sudden
change in the price of the stock.
MARKET EFFICIENCY
c 49. Financial markets fluctuate daily because they: a. are inefficient. b. slowly react to new information. c. are continually reacting to new information. d. offer tremendous arbitrage opportunities. e. only reflect historical information.