Dollar returns are generally used less frequently than percentage returns because dollar returns:do not account for inflation while stated percentage...

1. Dollar returns are generally used less frequently than percentage returns because dollar returns:
2. a.do not account for inflation while stated percentage returns do.
3. b.can only be calculated on an annual basis.
4. c.are only estimates while percentage returns are actual.
5. d.depend on the amount invested and percentage returns do not.
6. e.require time value of money computations.

0.5 points  

QUESTION 2

1. Percentage returns:
2. I. easily convey the return for each dollar invested
3. II. relay information about a security more easily than dollar returns do
4. III. vary with the amount invested
5. IV. can be easily separated into dividend and capital gain yields
6. a.I and III only
7. b.I, II, III, and IV
8. c.II and III only
9. d.II and IV only
10. e.I, II, and IV only

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QUESTION 3

1. Over the period of 1926 through 2007:
2. a.large-company stocks outperformed bonds as well as small-company stocks.
3. b.small-company stocks outperformed large-company stocks.
4. c.inflation exceeded the rate of return on U. S. Treasury bills.
5. d.U.S. Treasury bills outperformed long-term government bonds.
6. e.long-term government bonds outperformed long-term corporate bonds.

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QUESTION 4

1. The period 1926 though 2007 illustrates that U.S. Treasury bills:
2. a.always outperform inflation on an annual basis.
3. b.sometimes outperform and sometimes underperform inflation on an annual basis.
4. c.always underperform inflation on an annual basis.
5. d.produce a rate of return roughly equivalent to the rate of return on long-term government bonds.
6. e.tend to produce an annual rate of return exactly equal to the annual inflation rate.

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QUESTION 5

1. Which of the following statements are correct?
2. I. The risk-free rate of return generally earns a risk premium of about one percent
3. II. The reward for bearing risk is called the standard deviation
4. III. Based on historical returns, there are rewards for bearing risk
5. IV. In general, the higher the risk, the higher the expected return
6. a.II, III, and IV only
7. b.III and IV only
8. c.I, II, and IV only
9. d.I, II, III, and IV
10. e.I and II only

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QUESTION 6

1. The risk-free rate is based on the rate applicable to:
2. a.long-term corporate bonds.
3. b.short-term corporate bonds.
4. c.U.S. Treasury bills.
5. d.long-term government bonds.
6. e.the Consumer Price Index.

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QUESTION 7

1. Standard deviation is one of the most common measures of the:
2. a.real average rate of return.
3. b.mean return on a security.
4. c.return on an investment.
5. d.volatility of returns over time.
6. e.risk premium applicable to a security.

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QUESTION 8

1. If the financial markets are efficient, then an unexpected negative announcement about a firm's earnings will:
2. a.cause the price of that firm's stock to decline over a week s period as the news spreads.
3. b.cause the price of that firm's stock to instantly adjust with minor corrections being made in the following week so that the news is accurately reflected in the price.
4. c.cause the price of that firm's stock to instantly adjust to the appropriate price given the new information without further tendency to move upward or downward.
5. d.cause all prices in the market to decline over a week s period as the news spreads.
6. e.instantly cause all prices in the market to decline and then readjust over a couple of days as the information is absorbed.

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QUESTION 9

1. The Efficient Market Hypothesis (EMH):
2. a.argues that market prices rarely reflect the true value of a security.
3. b.acknowledges that some fairly sizeable inefficiencies will exist even in efficient markets, but only over the long-term.
4. c.argues that markets which fluctuate noticeably from one day to the next cannot be efficient.
5. d.suggests that an efficient market incorporates only about 90 percent of all public information into the market prices.
6. e.advocates that all investments in an efficient market have a net present value of zero.

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QUESTION 10

1. Which one of the following supports the argument that financial markets are semistrong form efficient?
2. a.only company insiders have a marketplace advantage
3. b.financial analysts gain a marketplace advantage by studying financial statements
4. c.all information, public and private, is included in current market prices
5. d.technical analysis based on price patterns provides a marketplace advantage
6. e.only historical information is reflected in the market prices of securities

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QUESTION 11

1. One year ago, you purchased 100 shares of stock for $38 a share. The stock pays dividends of $0.20 per share per quarter. Today, you sold your shares for $40.50 a share. What is your total dollar return on this investment?
2. a.$340
3. b.$270
4. c.$330
5. d.$285
6. e.$315

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QUESTION 12

1. Blackwell, Inc., pays a constant annual dividend. Last year, the dividend yield was 4.2% when the stock was selling for $30 a share. What is the current price of the stock if the current dividend yield is 4.5%?
2. a.$1.32
3. b.$29.26
4. c.$26.79
5. d.$28.00
6. e.$1.26

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QUESTION 13

1. A year ago, Andy purchased 300 shares of RWJ stock for $14,400. The stock is currently selling for $36 a share and Andy has decided to sell all of his shares. What is total return that Andy has earned on this investment if he received a special dividend of $5 a share?
2. a.-1.38%
3. b.-19.44%
4. c.-14.58%
5. d.-25.00%
6. e.-8.89%

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QUESTION 14

1. You earned 15.9% on your investments for a time period when the risk-free rate was 7.3% and the inflation rate was 5.8%. What was your real rate of return? (Hint: Use equation 7.2 on page 220)
2. a.9.55%
3. b.10.10%
4. c.8.45%
5. d.10.60%
6. e.9.89%

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QUESTION 15

1. You expect the inflation rate to be 5.2% and the U.S. Treasury bill yield to be 6.5% for the next year. You also expect the risk premium on small-company stocks to be 3.2% for the year. What rate of return do you expect to earn on small-company stocks over the next year?
2. a.9.7%
3. b.8.4%
4. c.14.9%
5. d.11.7%
6. e.3.3%

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QUESTION 16

1. Over the past four years, large-company stocks and U.S. Treasury bills have produced the returns stated below.
2.                                                                    Year 1     Year 2     Year 3     Year 4
3. Percent return on large-company stocks    12             5             9             18
4. Percent return on U.S. Treasury bills            2            3             3               4
5. During this period, inflation averaged 2.9%. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills and the standard deviation for large-company stocks was _____ as compared to ____ for Treasury bills.
6. a.7.87; 1.00; 6.24; 1.01
7. b.7.87; 0.10; 4.87; 0.67
8. c.11.00; .03; 6.24; 1.01
9. d.11.00; .03; 5.48; 0.82
10. e.7.87; 0.10; 5.48; 0.82

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QUESTION 17

1. Over the past six years, a stock produced returns of 12%, 16%, -3%, 7%, -5%, and 9%. Based on these six years, what range of returns would you expect to see 95% of the time?
2. a.-14.28% to 25.28%
3. b.-18.58% to 26.58%
4. c.-23.18% to 31.48%
5. d.-2.34% to 14.34%
6. e.-10.69% to 22.69%

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QUESTION 18

1. A stock has an average return of 14.5 percent and a standard deviation of 9.2 percent. In any one given year, you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent.
2. a.-3.9; 32.9
3. b.14.5; 18.4
4. c.-3.9; 18.4
5. d.5.3; 23.7
6. e.5.3; 14.5

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QUESTION 19

1. A stock produced returns of 11%, -14%, and 3% over three of the past four years. The arithmetic average for the past four years is 6.5%. What is the standard deviation of the stock's returns for this four year period?
2. a.18.34%
3. b.8.33%
4. c.14.43%
5. d.10.67%
6. e.16.66%

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QUESTION 20

1. The common stock of Johnson & Johnson has yielded 11.4%, 13.2%, 8.5%, 1.2%, and 14.8% over the past five years, respectively. What is the geometric average return?
2. a.10.38%
3. b.10.87%
4. c.10.06%
5. d.11.26%
6. e.9.71%

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QUESTION 21

1. The expected return on a security given two unequal states of the economy:
2. a.is affected by the probability of occurrence of each economic state.
3. b.is computed as the arithmetic average of the returns for each state.
4. c.is computed as the geometric average of the returns for each state.
5. d.will equal the overall expected return on the market.
6. e.will always be higher than that based on a single economic state.

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QUESTION 22

1. The portfolio weights for a portfolio consisting of multiple securities given multiple states of the economy are based on the:
2. a.market value of the investment in each individual security.
3. b.probabilities of occurrence of each economic state.
4. c.expected rates of return of each security given a normal economic state.
5. d.amount of the original investment in each security.
6. e.beta of each individual security.

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QUESTION 23

1. The standard deviation of a portfolio:
2. a.is based on a geometric average of the standard deviations of the individual securities included in the portfolio.
3. b.measures only the systematic risk of that portfolio.
4. c.measures only the unsystematic risk of that portfolio.
5. d.considers the current value of the investments within that portfolio.
6. e.is equal to the weighted arithmetic average of the standard deviations of the individual securities included in the portfolio.

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QUESTION 24

1. Which one of the following is considered an example of systematic risk?
2. a.lower company sales than predicted
3. b.resignation of a firm's chief financial officer
4. c.an increase in overseas sales for a conglomerate, such as General Electric
5. d.higher company profits than those forecasted
6. e.a higher inflation rate than predicted

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QUESTION 25

1. Which one of the following is best classified as unsystematic risk?
2. a.an unexpected recessionary period
3. b.a sudden decline in national exports
4. c.a sudden increase in the inflation rate
5. d.an unexpected decline in the sales of a firm
6. e.an unexpected increase in interest rates

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QUESTION 26

1. A portfolio that is adequately diversified should produce a return which:
2. a.is equivalent to beta multiplied by the market risk premium.
3. b.is equal to the risk-free rate plus the standard deviation times the market risk premium.
4. c.is superior to the overall market if the portfolio beta has been reduced to 1.0.
5. d.is equal to the risk-free rate.
6. e.lies at a point on the security market line given the portfolio's beta.

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QUESTION 27

1. An increase in the unsystematic risk of a portfolio will _____ the portfolio's beta.
2. a.either decrease or not change
3. b.not change
4. c.decrease
5. d.increase
6. e.either increase or not change

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QUESTION 28

1. If a group of securities are correctly priced, then the reward-to-risk ratio:
2. a.is equal for each security.
3. b.for each security must equal 1.0.
4. c.for the entire group must equal 1.0.
5. d.for each security must equal 0.
6. e.of the combined group is equal to that of a risk-free security.

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QUESTION 29

1. Which of the following will increase the rate of return for a security that plots on the security market line?
2. I. increasing the risk-free rate of return
3. II. decreasing the beta of the security
4. III. increasing the market risk premium
5. IV. increasing the market risk-to-reward ratio
6. a.I, III, and IV only
7. b.I, II, and III only
8. c.I, II, III, and IV
9. d.I and III only
10. e.II and IV only

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QUESTION 30

1. The Capital Asset Pricing Model states that the expected return on a security depends on which of the following?
2. I. pure time value of money
3. II. amount of systematic risk as measured by beta
4. III. the reward for bearing systematic risk as measured by the market risk premium
5. IV. the reward for bearing risk as measured by the standard deviation
6. a.I, II, and III only
7. b.II, III, and IV only
8. c.I, II, III, and IV
9. d.II and IV only
10. e.I and III only

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QUESTION 31

1. The stock of Digimon is expected to produce the following returns given the various states of the economy.
2.                                                             Probability
3.                         State of                        of State of                     Rate of
4.                         Economy                      Economy                      Return
5.                         Recession                        0.20                            -0.18
6.                         Normal                             0.70                            0.09
7.                         Boom                               0.10                            0.14
8. What is the expected return on this stock?
9. a.4.9%
10. b.10.7%
11. c.4.1%
12. d.11.3%
13. e.7.2%

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QUESTION 32

1. The stock of Kramer's Machine Shop has an expected return of 3.3%. Given the information below, what is the expected return on this stock if the economy booms?
2.                                                              Probability
3.                         State of                         of State of                     Rate of
4.                         Economy                      Economy                      Return
5.                         Recession                        0.35                           -0.04
6.                         Normal                               0.60                           0.07
7.                         Boom                                 0.05                                ?
8. a.10.0%
9. b.10.69%
10. c.8.6%
11. d.10.48%
12. e.9.2%

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QUESTION 33

1. Given the following information, what is the standard deviation for this stock?
2.                                                              Probability
3.                         State of                         of State of                     Rate of
4.                         Economy                      Economy                      Return
5.                         Boom                              0.05                              0.15
6.                         Normal                            0.65                              0.08 
7.                        Recession                      0.30                              -0.05
8. a.5.98%
9. b.6.37%
10. c.6.87%
11. d.6.03%
12. e.5.84%

0.5 points  

QUESTION 34

1. You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio?
2.                                        Number              Price             Expected
3.                Stock             Of Shares         Per Share           Return            
4.                   J                     300                   $43                 0.11
5.                   K                    500                   $23                 0.09
6.                   L                     200                   $  8                 -0.25
7.                   M                    100                   $56                   0.14
8. a.9.52%
9. b.9.69%
10. c.8.98%
11. d.10.20%
12. e.9.88%

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QUESTION 35

1. A portfolio is invested 40% in stock A, 30% in stock B, and 30% in stock C. Assuming that the returns are normally distributed, what is the 68% probability range of returns for any given year?
2. State of      Probability of                     Rate of Return if State Occurs     
3. Economy State of Economy       Stock A             Stock B            Stock C
4. Boom               0.10                   0.05                  0.16                   0.23
5. Normal             0.70                   0.08                  0.09                   0.11
6. Recession          0.20                   0.15                 -0.03                  -0.25
7. a.4.99% to 18.67%
8. b.1.69% to 8.34%
9. c.2.29% to 12.37%
10. d.4.12% to 15.18%
11. e.3.68% to 13.89%

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QUESTION 36

1. You have a portfolio comprised of the following. What is your portfolio beta?
2. Stock               Value              Beta
3.   A                  $2,500               1.2
4.   B                  $3,200               0.7
5.   C                  $4,800              1.6
6.   D                  $4,500               1.1
7. a.1.41
8. b.1.36
9. c.1.34
10. d.1.27
11. e.1.19

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QUESTION 37

1. You currently own a portfolio valued at $16,000 that has a beta of 1.2. You have another $8,000 to invest and would like to invest it in a manner such that the risk of your portfolio matches that of the overall market. What does the beta of the new security have to be?
2. a.0.5
3. b.0.3
4. c.0.8
5. d.0.6
6. e.0.9

0.5 points  

QUESTION 38

1. Stock A has an expected return of 12% and a beta of 1.2. Stock B has an expected return of 9% and a beta of 0.8. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?
2. a.3.5%
3. b.4.5%
4. c.4.0%
5. d.2.5%
6. e.3.0%

0.5 points  

QUESTION 39

1. Stock X has a beta of 0.9 and an expected return of 12%. Stock Y has a beta of 1.4 and an expected return of 16%. What is the risk-free rate if these securities both plot on the security market line?
2. a.5.0%
3. b.4.4%
4. c.4.8%
5. d.4.6%
6. e.4.2%

0.5 points  

QUESTION 40

1. You own a stock that has an expected return of 13.6% and a beta of 1.3. The U.S. Treasury bill is yielding 4.2% and the inflation rate is 3.8%. What is the expected rate of return on the market?
2. a.10.67%
3. b.9.74%
4. c.9.80%
5. d.11.43%
6. e.10.87%