Financial Management - Chapter 12 Some Lessons from Capital Market History

Chapter 12 Some Lessons from Capital Market History

 

1.

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?    A.  risk premium B.  geometric return C.  arithmetic D.  standard deviation E.  variance Refer to section 12.3

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.3 Topic: Risk premium

2.

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. Refer to section 12.4

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.4 Topic: Variance

3.	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 Refer to section 12.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.4 Topic: Standard deviation

4.	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 Refer to section 12.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.4 Topic: Normal distribution

5.	The average compound return earned per year over a multi-year period is called the _____ average return.    A.  arithmetic B.  standard C.  variant D.  geometric E.  real Refer to section 12.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.5 Topic: Geometric average return

6.	The return earned in an average year over a multi-year period is called the _____ average return.    A.  arithmetic B.  standard C.  variant D.  geometric E.  real Refer to section 12.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.5 Topic: Arithmetic average return

7.

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?    A.  riskless market B.  evenly distributed market C.  zero volatility market D.  Blume's market E.  efficient capital market Refer to section 12.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Efficient capital market

8.

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.  Profits are removed as a market incentive when markets become efficient. Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Efficient markets

9.

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment?    A.  The dividend yield is expressed as a percentage of the selling price. B.  The capital gain would have been less had Stacy not received the dividends. C.  The total dollar return per share is $3. D.  The capital gains yield is positive. E.  The dividend yield is greater than the capital gains yield. Refer to section 12.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Returns

10.

Which one of the following correctly describes the dividend yield?    A.  next year's annual dividend divided by today's stock price B.  this year's annual dividend divided by today's stock price C.  this year's annual dividend divided by next year's expected stock price D.  next year's annual dividend divided by this year's annual dividend E.  the increase in next year's dividend over this year's dividend divided by this year's dividend Refer to section 12.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Dividend yield

11.

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:    A.  was unaffected by the announcement. B.  increased proportionately with the dividend decrease. C.  decreased proportionately with the dividend decrease. D.  decreased by $0.14 per share. E.  increased by $0.14 per share. Refer to section 12.1

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Dividend yield

12.

Which one of the following statements related to capital gains is correct?    A.  The capital gains yield includes only realized capital gains. B.  An increase in an unrealized capital gain will increase the capital gains yield. C.  The capital gains yield must be either positive or equal to zero. D.  The capital gains yield is expressed as a percentage of the sales price. E.  The capital gains yield represents the total return earned by an investor. Refer to section 12.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Capital gains yield

13.

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.    A.  I only B.  I and II only C.  I and III only D.  I and IV only E.  IV only Refer to section 12.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Stock returns

14.	The real rate of return on a stock is approximately equal to the nominal rate of return:    A.  multiplied by (1 + inflation rate). B.  plus the inflation rate. C.  minus the inflation rate. D.  divided by (1 + inflation rate). E.  divided by (1 - inflation rate). Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.3 Topic: Real return

15.	As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.    A.  greater than B.  equal to C.  less than D.  greater than or equal to E.  unrelated to Refer to section 12.3

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.3 Topic: Real return

16.

Small-company stocks, as the term is used in the textbook, are best defined as the:    A.  500 newest corporations in the U.S. B.  firms whose stock trades OTC. C.  smallest twenty percent of the firms listed on the NYSE. D.  smallest twenty-five percent of the firms listed on NASDAQ. E.  firms whose stock is listed on NASDAQ. Refer to section 12.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.2 Topic: Small-company stocks

17.

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2010?    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. Refer to section 12.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.2 Topic: Historical record

18.	Which one of the following categories of securities had the highest average return for the period 1926-2010?    A.  U.S. Treasury bills B.  large company stocks C.  small company stocks D.  long-term corporate bonds E.  long-term government bonds Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 Topic: Historical returns

19.	Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?    A.  long-term government bonds B.  small company stocks C.  large company stocks D.  long-term corporate bonds E.  U.S. Treasury bills Refer to section 12.3

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.3 Topic: Risk premium

20.	Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?    A.  long-term corporate bonds B.  large-company stocks C.  intermediate-term government bonds D.  U.S. Treasury bills E.  small-company stocks Refer to section 12.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Historical risks

21.

Which one of the following statements correctly applies to the period 1926-2010?    A.  Large-company stocks earned a higher average risk premium than did small-company stocks. B.  Intermediate-term government bonds had a higher average return than long-term corporate bonds. C.  Large-company stocks had an average annual return of 14.7 percent. D.  Inflation averaged 2.6 percent for the period. E.  U.S. Treasury bills had a positive average real rate of return. Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 Topic: Historical returns

22.	Which one of the following time periods is associated with high rates of inflation?    A.  1929-1933 B.  1957-1961 C.  1978-1981 D.  1992-1996 E.  2001-2005 Refer to section 12.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.2 Topic: Inflation

23.

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2010?    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. Refer to sections 12.2 and 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.2 and 12.3 Topic: Historical returns

24.

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? 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 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 Refer to section 12.4

AACSB: Analytic Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Historical risks

25.	What was the highest annual rate of inflation during the period 1926-2010?    A.  between 0 and 3 percent B.  between 3 and 5 percent C.  between 5 and 10 percent D.  between 10 and 15 percent E.  between 15 and 20 percent Refer to section 12.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.2 Topic: Inflation

26.

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.  the risk-free rate plus the inflation rate. E.  risk-free rate minus the inflation rate. Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.3 Topic: Excess return

27.	Which one of the following earned the highest risk premium over the period 1926-2010?    A.  long-term corporate bonds B.  U.S. Treasury bills C.  small-company stocks D.  large-company stocks E.  long-term government bonds Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.3 Topic: Risk premium

28.	What was the average rate of inflation over the period of 1926-2010?    A.  less than 2.0 percent B.  between 2.0 and 2.5 percent C.  between 2.5 and 3.0 percent D.  between 3.0 and 3.5 percent E.  greater than 3.5 percent Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 Topic: Inflation

29.

Assume that you invest in a portfolio of large-company stocks. Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010. What rate of return should you expect to earn?    A.  less than 10 percent B.  between 10 and 12.5 percent C.  between 12.5 and 15 percent D.  between 15 and 17.5 percent E.  more than 17.5 percent Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 Topic: Historical returns

30.	The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2010.    A.  3 B.  5 C.  7 D.  9 E.  11 Refer to section 12.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 Topic: Historical returns

31.	Which one of the following was the least volatile over the period of 1926-2010?    A.  large-company stocks B.  inflation C.  long-term corporate bonds D.  U.S. Treasury bills E.  intermediate-term government bonds Refer to section 12.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Historical risks

32.

Which one of the following statements is correct?    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 return, the greater the risk premium. D.  The risk premium is unrelated to the average rate of return. E.  The risk premium is not affected by the volatility of returns. Refer to sections 12.3 and 12.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.3 and 12.4 Topic: Risk premium

33.

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    A.  II only B.  III only C.  I and II only D.  II and III only E.  III and IV only Refer to section 12.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Frequency distribution

34.	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. Refer to section 12.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Risk premium

35.

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    A.  I only B.  IV only C.  II and III only D.  I and III only E.  II and IV only Refer to section 12.4

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Variability of returns

36.

Which one of the following statements is correct based on the historical record for the period 1926-2010?    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 underperformed intermediate-term government bonds. Refer to section 12.4

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Historical returns and risks

37.	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 Refer to section 12.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-03 The historical risks on various important types of investments. Section: 12.4 Topic: Probability distribution

38.	According to Jeremy Siegel, the real return on stocks over the long-term has averaged about:    A.  6.7 percent B.  8.7 percent C.  10.4 percent D.  12.3 percent E.  14.8 percent Refer to section 12.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.5 Topic: Historical returns

39.

The historical record for the period 1926-2010 supports which one of the following statements?    A.  A higher-risk security will provide a higher rate of return next year than will a lower-risk security. B.  If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. C.  Increased long-run potential returns are obtained by lowering risks. D.  It is possible for small-company stocks to more than double in value in any one given year. E.  Inflation was positive each year throughout the period of 1926-2010. Refer to sections 12.2 and 12.4

AACSB: Analytic Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.2 and 12.4 Topic: Historical returns

40.

Which of the following statements are true based on the historical record for 1926-2010? 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.    A.  I only B.  IV only C.  II and III only D.  II and IV only E.  II, III, and IV only Refer to sections 12.3 and 12.4

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 and 12.4 Topic: Historical returns and risks

41.

Estimates of the rate of return on a security based on a 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; accurately Refer to section 12.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.5 Topic: Blume's formula

42.

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. Refer to section 12.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.5 Topic: Blume's formula

43.

Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released? I. insiders knew the information prior to the announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated    A.  I and II only B.  I and III only C.  II and III only D.  II and IV only E.  III and IV only Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

44.

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 Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

45.

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. E.  New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock. Refer to section 12.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

46.

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. Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

47.	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. Refer to section 12.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

48.

According to theory, studying historical stock price movements to identify mispriced stocks:    A.  is effective as long as the market is only semistrong form efficient. B.  is effective provided the market is only weak form efficient. C.  is ineffective even when the market is only weak form efficient. D.  becomes ineffective as soon as the market gains semistrong form efficiency. E.  is ineffective only in strong form efficient markets. Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

49.

Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for investors to earn abnormal returns. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient.    A.  I and III only B.  II and IV only C.  I and IV only D.  I, III, and IV only E.  I, II, and III only Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

50.	If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace.    A.  weak B.  semiweak C.  semistrong D.  strong E.  perfect Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

51.

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 Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

52.

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 Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

53.

Individuals who continually monitor the financial markets seeking mispriced securities:    A.  earn excess profits over the long-term. 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. Refer to section 12.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 The implications of market efficiency. Section: 12.6 Topic: Market efficiency

54.

One year ago, you purchased a stock at a price of $33.49. The stock pays quarterly dividends of $0.20 per share. Today, the stock is selling for $28.20 per share. What is your capital gain on this investment?    A.  -$5.49 B.  -$5.29 C.  -$4.76 D.  -$4.16 E.  -$5.09 Capital gain = $28.20 - $33.49 = -$5.29

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Capital gain

55.

Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $0.15 a share. Today, you sold all of your shares for $40.10 per share. What is the total amount of your dividend income on this investment?    A.  $15 B.  $30 C.  $45 D.  $50 E.  $60 Dividend income = ($0.15 × 2) × 100 = $30

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Dividend income

56.

A year ago, you purchased 300 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?    A.  -$382 B.  -$1,372 C.  -$1,528 D.  -$1,116 E.  -$1,360 Total dollar return = ($4.80 - $8.62 + $0.10) × 300 = -$1,116

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Total dollar return

57.	You own 400 shares of Western Feed Mills stock valued at $51.20 per share. What is the dividend yield if your annual dividend income is $352?    A.  1.68 percent B.  1.72 percent C.  1.83 percent D.  1.13 percent E.  1.21 percent Dividend yield = ($352/400)/$51.20 = 1.72 percent

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Dividend yield

58.

West Wind Tours stock is currently selling for $48 a share. The stock has a dividend yield of 3.2 percent. How much dividend income will you receive per year if you purchase 200 shares of this stock?    A.  $24.96 B.  $36.20 C.  $424.80 D.  $362.00 E.  $307.20 Dividend income = $48 × 0.032 × 200 = $307.20

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Dividend yield

59.

One year ago, you purchased a stock at a price of $47.50 a share. Today, you sold the stock and realized a total loss of 22.11 percent. Your capital gain was -$12.70 a share. What was your dividend yield?    A.  4.63 percent B.  4.88 percent C.  5.02 percent D.  12.67 percent E.  14.38 percent Dividend yield = -0.2211 - (-12.70/$47.50) = 4.63 percent

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.1 Topic: Dividend yield