Q&A Hero

Q: The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock? A) 1.46 B) 1.23 C) 1.33 D) 1.41 E) 1.55

Q: Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock? A) 3.47 percent B) 7.03 percent C) 8.82 percent D) 8.99 percent E) 7.80 percent

Q: Over a 25-year period an asset had an arithmetic return of 13.1 percent and a geometric return of 12.6 percent. Using Blume's formula, what is your best estimate of the future annual returns over the next 10 years? A) 11.18 percent B) 13.04 percent C) 11.84 percent D) 12.91 percent E) 12.46 percent

Q: Assume the returns from an asset are normally distributed. The average annual return for the asset is 17.4 percent and the standard deviation of the returns is 27.5 percent. What is the approximate probability that your money will double in value in a single year? A) Close to .5 percent B) Close to 1 percent C) Less than 2.5 percent but greater than 1 percent D) Less than 5 percent but greater than 2.5 percent E) Less than 10 percent but greater than 5 percent

Q: A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7 percent, and 6.3 percent over the last six years. What is the geometric average return on the stock for this period? A) 7.90 percent B) 7.46 percent C) 8.56 percent D) 7.76 percent E) 8.01 percent

Q: A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 15 years. What is the estimated average rate of return for the next six years based on Blume's formula? A) 14.79 percent B) 14.96 percent C) 15.28 percent D) 15.18 percent E) 15.42 percent

Q: Based on the past 13 years, Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 12.6 percent. The geometric average return for the same period was 11.8 percent. What is the estimated return on this stock for the next three years according to Blume's formula? A) 11.74 percent B) 11.92 percent C) 12.13 percent D) 11.38 percent E) 12.47 percent

Q: Over the past 12 years, the common stock of The Flower Shoppe has produced an arithmetic average return of 12.6 percent and a geometric average return of 12.3 percent. What is the projected return on this stock for the next five years according to Blume's formula? A) 11.70 percent B) 11.89 percent C) 12.49 percent D) 12.03 percent E) 12.12 percent

Q: Over the past four years a stock had prices of $12.78, $13.34, $16.30, and $15.40, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock? A) 9.87 percent B) 9.98 percent C) 9.33 percent D) 10.91 percent E) 9.48 percent

Q: A stock had returns of 13 percent, 11 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? A) 4.93 percent B) 4.67 percent C) 5.13 percent D) 5.39 percent E) 5.26 percent

Q: A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent. A) 5.80; 4.86 B) 5.80; 5.03 C) 5.62; 5.03 D) 5.40; 5.03 E) 5.40; 4.86

Q: A stock had annual returns of 5.1 percent, 12.2 percent, −3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is ________ percent while the geometric average return for the period is ________ percent. A) 5.73; 5.06 B) 5.73; 5.55 C) 5.91; 5.74 D) 5.91; 5.62 E) 5.73; 8.92

Q: You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 8 percent, −5 percent, 16 percent, 12 percent, and 8 percent. What is the variance of these returns? A) .07887 B) .00622 C) .01725 D) .01684 E) .00836

Q: A stock had annual returns of 6 percent, 13 percent, 11 percent, −8 percent, and 3 percent for the past five years, respectively. What is the standard deviation of returns for this stock? A) 10.79 percent B) 12.60 percent C) 6.48 percent D) 14.42 percent E) 8.28 percent

Q: Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 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? A) Greater than .5 but less than 1.0 percent B) Greater than 1 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 percent

Q: A stock had returns of 14 percent, 13 percent, −10 percent, and 7 percent for the past four years. Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year? A) Greater than .5 but less than 1.0 percent B) Greater than 1 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 percent

Q: A stock had returns of 3 percent, 12 percent, 26 percent, −14 percent, and −1 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year? A) Approximately .1 percent B) Approximately 5 percent C) Approximately 2.5 percent D) Approximately .5 percent E) Approximately 16 percent

Q: Aimee is the owner of a stock with annual returns of 17.6 percent, −11.7 percent, 5.6 percent, and 9.7 percent for the past four years. She thinks the stock may achieve a return of 17 percent again this coming year. What is the probability that your friend is correct? A) Less than .5 percent B) Greater than .5 percent but less than 1 percent C) Greater than 1 percent but less than 2.5 percent D) Greater than 2.5 percent but less than 16 percent E) Greater than 16 percent

Q: A stock had annual returns of 11.3 percent, 9.8 percent, −7.3 percent, and 14.6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year? A) −2.4 to 17.5 percent B) −2.60 to 11.80 percent C) −12.5 to 26.7 percent D) −10.4 to 12.3 percent E) −10.9 to 25.1 percent

Q: A stock has an expected rate of return of 9.8 percent and a standard deviation of 15.4 percent. Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year? A) less than 16 percent B) less than .5 percent C) less than 1.0 percent D) less than 2.5 percent E) less than 5.0 percent

Q: A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year? A) Less than 2.5 percent but more than .5 percent B) More than 16 percent C) Less than .5 percent D) Less than 1 percent but more than .5 percent E) Less than 16 percent but more than 2.5 percent

Q: The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns? A) 8.29 percent B) 9.14 percent C) 11.54 percent D) 7.78 percent E) 10.66 percent

Q: A stock had returns of 5 percent, 14 percent, 11 percent, −8 percent, and 6 percent over the past five years. What is the standard deviation of these returns? A) 7.74 percent B) 8.21 percent C) 9.68 percent D) 8.44 percent E) 7.49 percent

Q: You find a certain stock that had returns of 8 percent, −3 percent, 12 percent, and 17 percent for four of the last five years. The average return of the stock for the past five-year period was 6 percent. What is the standard deviation of the stock's returns for the five-year period? A) 10.39 percent B) 4.98 percent C) 7.16 percent D) 9.25 percent E) 5.38 percent

Q: You bought one of Shark Repellant's 6 percent coupon bonds one year ago for $867. These bonds pay annual payments, have a face value of $1,000, and mature 12 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 7.4 percent. The inflation rate over the past year was 2.9 percent. What was your total real return on this investment? A) 6.48 percent B) 6.61 percent C) 8.18 percent D) 7.44 percent E) 9.70 percent

Q: You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 7 percent, 13 percent, 19 percent, −8 percent, and 15 percent. Suppose the average inflation rate over this time period was 2.6 percent and the average T-bill rate was 3.1 percent. Based on this information, what was the average nominal risk premium? A) 6.6 percent B) 6.1 percent C) 9.2 percent D) 1.2 percent E) 3.5 percent

Q: What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent? A) 0 percent B) 2.8 percent C) .5 percent D) 1.7 percent E) 4.3 percent

Q: Christina purchased 500 shares of stock at a price of $62.30 a share and sold the shares for $64.25 each. She also received $738 in dividends. If the inflation rate was 3.9 percent, what was her exact real rate of return on this investment? A) 4.20 percent B) 1.54 percent C) 1.60 percent D) 3.95 percent E) 5.50 percent

Q: Leo purchased a stock for $63.80 a share, received a dividend of $2.68 a share and sold the shares for $59.74 each. During the time he owned the stock, inflation averaged 2.8 percent. What is his approximate real rate of return on this investment? A) −.64 percent B) −4.96 percent C) −2.16 percent D) 2.16 percent E) 4.96 percent

Q: Suppose you bought a $1,000 face value bond with a coupon rate of 5.6 percent one year ago. The purchase price was $987.50. You sold the bond today for $994.20. If the inflation rate last year was 2.6 percent, what was your exact real rate of return on this investment? A) 4.88 percent B) 5.32 percent C) 3.65 percent D) 3.78 percent E) 4.47 percent

Q: Suppose a stock had an initial price of $76 per share, paid a dividend of $1.42 per share during the year, and had an ending share price of $81. What was the capital gains yield? A) 6.17 percent B) 6.69 percent C) 7.05 percent D) 6.58 percent E) 5.44 percent

Q: One year ago, you purchased 100 shares of Best Wings stock at a price of $38.19 a share. The company pays an annual dividend of $.46 per share. Today, you sold for the shares for $37.92 a share. What is your total percentage return on this investment? A) 2.62 percent B) 1.93 percent C) 2.72 percent D) 1.08 percent E) .50 percent

Q: Four months ago, you purchased 900 shares of LBM stock for $7.68 a share. Last month, you received a dividend payment of $.12 a share. Today, you sold the shares for $9.13 a share. What is your total dollar return on this investment? A) $1,305 B) $1,413 C) $1,512 D) $1,394 E) $1,080

Q: Today, you sold 540 shares of stock and realized a total return of 7.3 percent. You purchased the shares one year ago at a price of $24 a share and have received a total of $86 in dividends. What is your capital gains yield on this investment? A) 5.68 percent B) 6.64 percent C) 6.39 percent D) 7.26 percent E) 7.41 percent

Q: Last year, you purchased 400 shares of Analog stock for $12.92 a share. You have received a total of $136 in dividends and $4,301 in proceeds from selling the shares. What is your capital gains yield on this stock? A) 9.09 percent B) 6.73 percent C) −16.78 percent D) −14.14 percent E) −11.02 percent

Q: You just sold 427 shares of stock at a price of $19.07 a share. You purchased the stock for $18.83 a share and have received total dividends of $614. What is the total capital gain on this investment? A) $716.48 B) $511.52 C) $102.48 D) $618.48 E) $476.52

Q: One year ago, you purchased a stock at a price of $38.22 a share. Today, you sold the stock and realized a total loss of 11.09 percent on your investment. Your capital gain was $4.68 a share. What was your dividend yield? A) 1.15 percent B) .88 percent C) 1.02 percent D) .67 percent E) .38 percent

Q: West Wind Tours stock is currently selling for $52.30 a share. The stock has a dividend yield of 2.48 percent. How much dividend income will you receive per year if you purchase 600 shares of this stock? A) $824.96 B) $836.20 C) $724.80 D) $762.00 E) $778.22

Q: You own 850 shares of Western Feed Mills stock valued at $53.15 per share. What is the dividend yield if your total annual dividend income is $1,256? A) 2.67 percent B) 2.78 percent C) 1.83 percent D) 2.13 percent E) 2.54 percent

Q: One year ago, you purchased 200 shares of SL Industries stock at a price of $18.97 a share. The stock pays an annual dividend of $1.42 per share. Today, you sold all of your shares for $17.86 per share. What is your total dollar return on this investment? A) $50 B) $91 C) $58 D) $62 E) $82

Q: Six months ago, you purchased 300 shares of stock in Global Trading at a price of $26.19 a share. The stock pays a quarterly dividend of $.12 a share. Today, you sold all of your shares for $27.11 per share. What is the total amount of your dividend income on this investment? A) $36 B) $72 C) $348 D) $144 E) $204

Q: One year ago, you purchased a stock at a price of $43.20 per share. The stock pays quarterly dividends of $.18 per share. Today, the stock is selling for $45.36 per share. What is your capital gain on this investment? A) $1.44 B) $2.16 C) $2.80 D) $1.74 E) $2.34

Q: Individual investors who continually monitor the financial markets seeking mispriced securities: A) earn excess profits on all of their investments. B) make the markets increasingly more efficient. C) are never able to find a security that is temporarily mispriced. D) are overwhelmingly successful in earning abnormal profits. E) are always quite successful using only historical price information as their basis of evaluation.

Q: The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ________ form efficient. A) weak B) semiweak C) semistrong D) strong E) perfect

Q: You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best ________ form efficient. A) weak B) semiweak C) semistrong D) strong E) perfect

Q: Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? A) Weak B) Semiweak C) Semistrong D) Strong E) Perfect

Q: Which one of the following statements related to market efficiency tends to be supported by current evidence? A) It is easy for investors to earn abnormal returns. B) Short-run price movements are easy to predict. C) Markets are most likely only weak form efficient. D) Mispriced stocks are easy to identify. E) Markets tend to respond quickly to new information.

Q: Evidence seems to support the view that studying public information to identify mispriced stocks is: A) effective as long as the market is only semistrong form efficient. B) effective provided the market is only weak form efficient. C) ineffective. D) effective only in strong form efficient markets. E) ineffective only in strong form efficient markets.

Q: Inside information has the least value when financial markets are: A) weak form efficient. B) semiweak form efficient. C) semistrong form efficient. D) strong form efficient. E) inefficient.

Q: Efficient financial markets fluctuate continuously because: A) the markets are continually reacting to old information as that information is absorbed. B) the markets are continually reacting to new information. C) arbitrage trading is limited. D) current trading systems require human intervention. E) investments produce varying levels of net present values.

Q: 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 issues new shares of stock if the market is efficient. E) New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market.

Q: Which one of the following is most indicative of a totally efficient stock market? A) Extraordinary returns earned on a routine basis B) Positive net present values on stock investments over the long-term C) Zero net present values for all stock investments D) Arbitrage opportunities which develop on a routine basis E) Realizing negative returns on a routine basis

Q: Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. A) Company insiders were aware of the information prior to the announcement. B) Investors do not pay attention to daily news. C) Investors tend to overreact. D) The news was positive. E) The information was expected.

Q: Which one of the following statements best defines the efficient market hypothesis? A) Efficient markets limit competition. B) Security prices in efficient markets remain steady as new information becomes available. C) Mispriced securities are common in efficient markets. D) All securities in an efficient market are zero net present value investments. E) All securities provide the same positive rate of return when the market is efficient.

Q: Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? A) Riskless market B) Evenly distributed market C) Zero volatility market D) Blume's market E) Efficient capital market

Q: The return earned in an average year over a multiyear period is called the ________ average return. A) arithmetic B) standard C) variant D) geometric E) real

Q: The average compound return earned per year over a multiyear period is called the ________ average return. A) arithmetic B) standard C) variant D) geometric E) real

Q: The primary purpose of Blume's formula is to: A) compute an accurate historical rate of return. B) determine a stock's true current value. C) consider compounding when estimating a rate of return. D) determine the actual real rate of return. E) project future rates of return.

Q: Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to ________ the expected return for the long-term and estimates using the historical geometric average will probably tend to ________ the expected return for the short-term. A) overestimate; overestimate B) overestimate; underestimate C) underestimate; overestimate D) underestimate; underestimate E) accurately estimate; accurately estimate

Q: Which of the following statements are true based on the historical record for 19262016? A) Risk-free securities produce a positive real rate of return each year. B) Bonds are generally a safer, or less risky, investment than are stocks. C) Risk and potential reward are inversely related. D) The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. E) Returns are more predictable over the short term than they are over the long term.

Q: Which one of the following is defined by its mean and its standard deviation? A) Arithmetic nominal return B) Geometric real return C) Normal distribution D) Variance E) Risk premium

Q: Standard deviation is a measure of which one of the following? A) Average rate of return B) Volatility C) Probability D) Risk premium E) Real returns

Q: Generally speaking, which of the following best correspond to a wide frequency distribution? A) High standard deviation, low rate of return B) Low rate of return, large risk premium C) Small risk premium, high rate of return D) Small risk premium, low standard deviation E) High standard deviation, large risk premium

Q: Which one of the following statements is correct based on the period 19262016? A) Long-term government bonds had more volatile annual returns than did the long-term corporate bonds. B) The standard deviation of the annual rate of inflation was less than 3 percent. C) U.S Treasury bills have a zero variance in returns because they are risk-free. D) The risk premium on small-company stocks was less than 10 percent. E) The risk premium on all U.S. government securities is 0 percent.

Q: Which one of the following had the least volatile annual returns over the period of 19262016? A) Large-company stocks B) Inflation C) Long-term corporate bonds D) U.S. Treasury bills E) Intermediate-term government bonds

Q: Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 19262016? 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) Long-term government bonds, long-term corporate bonds, intermediate-term government bonds D) Large-company stocks, small-company stocks, long-term government bonds E) Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

Q: What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A) 1.0 percent B) 2.5 percent C) 5.0 percent D) 16 percent E) 32 percent

Q: Which one of the following statements is correct based on the historical record for the period 19262016? A) The standard deviation of returns for small-company stocks was double that of large-company stocks. B) U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. C) Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. D) Inflation was less volatile than the returns on U.S. Treasury bills. E) Long-term government bonds were less volatile than intermediate-term government bonds.

Q: If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following as related to large-company stocks to occur as a result? A) Increase in the risk premium B) Increase in the average long-term rate of return C) Decrease in the 68 percent probability range of returns D) Increase in the standard deviation E) Increase in the geometric average rate of return

Q: Which one of the following categories of securities had the most volatile annual returns over the period 19262016? A) Long-term corporate bonds B) Large-company stocks C) Intermediate-term government bonds D) U.S. Treasury bills E) Small-company stocks

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

Q: To convince investors to accept greater volatility, you must: A) decrease the risk premium. B) increase the risk premium. C) decrease the real return. D) decrease the risk-free rate. E) increase the risk-free rate.

Q: Based on the period 1926-2016, the actual real return on large-company stocks has been around: A) 9 percent. B) 10 percent. C) 6 percent. D) 7 percent. E) 8 percent.

Q: The average annual return on small-company stocks was about ________ percent greater than the average annual return on large-company stocks over the period 19262016. A) 3 B) 5 C) 7 D) 9 E) 11

Q: Assume you invest in a portfolio of long-term corporate bonds. Based on the period 19262016, what average annual rate of return should you expect to earn? A) Less than 5 percent B) Between 5 and 6 percent C) Between 6 and 7 percent D) Between 7 and 8 percent E) More than 8 percent

Q: What was the average rate of inflation over the period of 19262016? A) Less than 2.0 percent B) Between 2.0 and 2.4 percent C) Between 2.4 and 2.8 percent D) Between 2.8 and 3.2 percent E) Greater than 3.2 percent

Q: Which one of the following earned the highest risk premium over the period 19262016? A) Long-term corporate bonds B) U.S. Treasury bills C) Small-company stocks D) Large-company stocks E) Long-term government bonds

Q: The excess return is computed as the: 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) risk-free rate plus the inflation rate. E) risk-free rate minus the inflation rate.

Q: Which one of the following statements correctly applies to the period 19262016? A) Large-company stocks earned a higher average risk premium than did small-company stocks. B) The average inflation rate exceeded the average return on U.S. Treasury bills. C) Large-company stocks had an average annual return of 14.7 percent. D) Inflation averaged 2.6 percent for the period. E) Long-term corporate bonds outperformed long-term government bonds.

Q: Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? A) Risk premium B) Geometric average return C) Arithmetic average return D) Standard deviation E) Variance