Question 1

Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500, a measure of the overall market, only returned an average of 13.9 percent. Explain how this can occur if the stock market is efficient.

Accepted Answer

An investor can purchase securities that...

Question 2

You want to invest in an index fund which directly correlates to the overall U.S. stock market. How can you determine if the market risk premium you are expecting to earn is reasonable for the long-term?

Accepted Answer

You could compare your expectation to the historical market risk premium for the United States, as well as other industrialized countries, realizing of course, that the future will not be exactly like the past. Nevertheless, this should indicate whether or not your expectation is at least reasonable.

Question 3

A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of $8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $4.80 per share. What is your total dollar return on this investment?

Accepted Answer

A)  -$382
B)  -$372
C)  -$1,528
D)  -$1,488
E)  -$1,360F) B) and C)
G) A) and E)

Question 4

You bought one of Great White Shark Repellant Co.'s 10 percent coupon bonds one year ago for $760. These bonds pay annual payments, have a face value of $1,000, and mature 14 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 14 percent. The inflation rate over the past year was 3.7 percent. What was your total real return on this investment?

Accepted Answer

A)  8.97 percent
B)  9.11 percent
C)  9.18 percent
D)  9.44 percent
E)  9.58 percentF) B) and D)
G) D) and E)

Question 5

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -12 percent, 27 percent, 22 percent, and 18 percent. What is the variance of these returns?

Accepted Answer

A)  0.02070
B)  0.02588
C)  0.01725
D)  0.01684
E)  0.02633F) C) and D)
G) A) and B)

Question 6

A stock has returns of 18 percent, 11 percent, -21 percent, and 6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

Accepted Answer

A)  -13.56 to 20.56 percent
B)  -24.60 to 31.80 percent
C)  -30.62 to 37.62 percent
D)  -47.68 to 54.68 percent
E)  -71.73 to 71.73 percentF) A) and C)
G) A) and E)

Question 7

Which one of the following was the least volatile over the period of 1926-2007?

Accepted Answer

A)  large-company stocks
B)  inflation
C)  long-term corporate bonds
D)  U.S.Treasury bills
E)  intermediate-term government bondsF) B) and C)
G) A) and E)

Question 8

The excess return is computed as the:

Accepted Answer

A)  return on a security minus the inflation rate.
B)  return on a risky security minus the risk-free rate.
C)  risk premium on a risky security minus the risk-free rate.
D)  the risk-free rate plus the inflation rate.
E)  risk-free rate minus the inflation rate.F) A) and E)
G) A) and B)

Question 9

A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

Accepted Answer

A)  4.57; 4.75
B)  4.75; 4.57
C)  6.33; 6.19
D)  6.19; 6.33
E)  6.33; 6.33F) A) and D)
G) A) and C) B

Question 10

What are the two primary lessons learned from capital market history?
 Use historical information to justify that these lessons are correct.

Accepted Answer

First, there is a reward for bearing ris...

Question 11

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years. What is the geometric average return for this time period?

Accepted Answer

A)  4.26 percent
B)  4.67 percent
C)  5.13 percent
D)  5.39 percent
E)  5.60 percentF) A) and B)
G) None of the above

Question 12

Which of the following statements is correct in relation to a stock investment?
I. The capital gains yield can be positive, negative, or zero.
II. The dividend yield can be positive, negative, or zero.
III. The total return can be positive, negative, or zero.
IV. Neither the dividend yield nor the total return can be negative.

Accepted Answer

A)  I only
B)  I and II only
C)  I and III only
D)  I and IV only
E)  IV onlyF) A) and E)
G) D) and E)

Question 13

If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result?
I. decrease in the average rate of return
II. increase in the risk premium
III. increase in the 68 percent probability range of the frequency distribution of returns
IV. decrease in the standard deviation

Accepted Answer

A)  I only
B)  IV only
C)  II and III only
D)  I and III only
E)  II and IV onlyF) B) and C)
G) C) and E)

Question 14

Over the past five years, a stock produced returns of 11 percent, 14 percent, 2 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Accepted Answer

A)  greater than 0.5 but less than 1.0 percent
B)  greater than 1.0 percent but less than 2.5 percent
C)  greater than 2.5 percent but less than 16 percent
D)  greater than 84 percent but less than 97.5 percent
E)  greater than 95 percentF) B) and C)
G) A) and B) D

Question 15

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2007?

Accepted Answer

A)  U.S.Treasury bill returns never exceeded a 9 percent return in any one year during the period.
B)  U.S.Treasury bills provided a positive rate of return each and every year during the period.
C)  Inflation equaled or exceeded the return on U.S.Treasury bills every year during the period.
D)  Long-term government bonds outperformed U.S.Treasury bills every year during the period.
E)  National deflation occurred at least once every decade during the period.F) A) and E)
G) A) and C)

Question 16

Which of the following statements are true based on the historical record for 1926-2007?
I. Risk and potential reward are inversely related.
II. Risk-free securities produce a positive real rate of return each year.
III. Returns are more predictable over the short-term than they are over the long-term.
IV. Bonds are generally a safer investment than are stocks.

Accepted Answer

A)  I only
B)  IV only
C)  II and III only
D)  II and IV only
E)  II, III, and IV onlyF) A) and B)
G) C) and D)

Question 17

Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield?

Accepted Answer

A)  1.55 percent
B)  1.69 percent
C)  8.05 percent
D)  8.75 percent
E)  10.44 percentF) A) and B)
G) A) and C)

Question 18

Which of the following correspond to a wide frequency distribution?
I. relatively low risk
II. relatively low rate of return
III. relatively high standard deviation
IV. relatively large risk premium

Accepted Answer

A)  II only
B)  III only
C)  I and II only
D)  II and III only
E)  III and IV onlyF) A) and B)
G) A) and C)

Question 19

Which one of the following best defines the variance of an investment's annual returns over a number of years?

Accepted Answer

A)  The average squared difference between the arithmetic and the geometric average annual returns.
B)  The squared summation of the differences between the actual returns and the average geometric return.
C)  The average difference between the annual returns and the average return for the period.
D)  The difference between the arithmetic average and the geometric average return for the period.
E)  The average squared difference between the actual returns and the arithmetic average return.F) A) and B)
G) A) and E)

Question 20

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2007?

Accepted Answer

A)  The annual rate of return always exceeded the annual inflation rate.
B)  The average risk premium was 0.7 percent.
C)  The annual rate of return was always positive.
D)  The average excess return was 1.1 percent.
E)  The average real rate of return was zero.F) C) and D)
G) A) and E)

Exam 12: Some Lessons From Capital Market History

Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500, a measure of the overall market, only returned an average of 13.9 percent. Explain how this can occur if the stock market is efficient.

Correct Answer
verified
An investor can purchase securities that...
View Answer

You want to invest in an index fund which directly correlates to the overall U.S. stock market. How can you determine if the market risk premium you are expecting to earn is reasonable for the long-term?

A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of $8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $4.80 per share. What is your total dollar return on this investment?

Correct Answer
verified

Correct Answer
verified

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -12 percent, 27 percent, 22 percent, and 18 percent. What is the variance of these returns?

Correct Answer
verified

A stock has returns of 18 percent, 11 percent, -21 percent, and 6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

Correct Answer
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Which one of the following was the least volatile over the period of 1926-2007?

Correct Answer
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The excess return is computed as the:

Correct Answer
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A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the past four years. The arithmetic average of these returns is _ percent while the geometric average return for the period is _ percent.

Correct Answer
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B

What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.

Correct Answer
verified
First, there is a reward for bearing ris...
View Answer

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years. What is the geometric average return for this time period?

Correct Answer
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Correct Answer
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Correct Answer
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Over the past five years, a stock produced returns of 11 percent, 14 percent, 2 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Correct Answer
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D

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2007?

Correct Answer
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Correct Answer
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Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield?

Correct Answer
verified

Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium

Correct Answer
verified

Which one of the following best defines the variance of an investment's annual returns over a number of years?

Correct Answer
verified

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2007?

Correct Answer
verified

Exam 12: Some Lessons From Capital Market History

Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500, a measure of the overall market, only returned an average of 13.9 percent. Explain how this can occur if the stock market is efficient.

Correct AnswerverifiedAn investor can purchase securities that...View AnswerShow Answer

You want to invest in an index fund which directly correlates to the overall U.S. stock market. How can you determine if the market risk premium you are expecting to earn is reasonable for the long-term?

A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of $8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $4.80 per share. What is your total dollar return on this investment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -12 percent, 27 percent, 22 percent, and 18 percent. What is the variance of these returns?

Correct AnswerverifiedShow Answer

A stock has returns of 18 percent, 11 percent, -21 percent, and 6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year?

Correct AnswerverifiedShow Answer

Which one of the following was the least volatile over the period of 1926-2007?

Correct AnswerverifiedShow Answer

The excess return is computed as the:

Correct AnswerverifiedShow Answer

A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

Correct AnswerverifiedB

What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.

Correct AnswerverifiedFirst, there is a reward for bearing ris...View AnswerShow Answer

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years. What is the geometric average return for this time period?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Over the past five years, a stock produced returns of 11 percent, 14 percent, 2 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Correct AnswerverifiedD

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2007?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $87. What was the capital gains yield?

Correct AnswerverifiedShow Answer

Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium

Correct AnswerverifiedShow Answer

Which one of the following best defines the variance of an investment's annual returns over a number of years?

Correct AnswerverifiedShow Answer

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2007?

Correct AnswerverifiedShow Answer

Correct Answer
verified
An investor can purchase securities that...
View Answer

Correct Answer
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Correct Answer
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A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the past four years. The arithmetic average of these returns is _ percent while the geometric average return for the period is _ percent.

Correct Answer
verified
B

Correct Answer
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First, there is a reward for bearing ris...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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D

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