FIN Exam 3 Chapter Practice Questions and Answers
The rate of return on which type of security is normally used as the risk-free rate of return?
Treasury bills
You purchased GARP stock one year ago at a price of $68.54 per share. Today, you sold your stock and earned a total return of 18.9...
FIN Exam 3 Chapter Practice Questions
and Answers
The rate of return on which type of security is normally used as the risk-free rate of
return? - answer Treasury bills
You purchased GARP stock one year ago at a price of $68.54 per share. Today, you
sold your stock and earned a total return of 18.91 percent. The stock paid dividends of
$3.04 per share over the year. What was the capital gains yield on your investment? -
answer 14.47%
A stock had returns of 17.33 percent, −11.19 percent, 22.83 percent, and 13.57 percent
for the past four years. What is the standard deviation of the returns? - answer
15.04%
Which one of the following earned the highest risk premium over the period 1926-2016?
- answer Small-company stocks
Which of the following statements are true based on the historical record for 1926-
2016?
Risk-free securities produce a positive real rate of return each year.
Bonds are generally a safer, or less risky, investment than are stocks.
Risk and potential reward are inversely related.
The normal distribution curve for large-company stocks is narrower than the curve for
small-company stocks.
Returns are more predictable over the short term than they are over the long term. -
answer Bonds are generally a safer, or less risky, investment than are stocks.
Which one of the following statements is correct concerning market efficiency? - answer
A firm will generally receive a fair price when it issues new shares of stock if the market
is efficient.
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. - answer
strong
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? - answer −12.5 to 26.7 percent
,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? - answer 4.93 percent
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. - answer 5.40;
4.86
A stock has had returns of 7 percent, 25 percent, 17 percent, −13 percent, 25 percent,
and −6 percent over the last six years.
What are the arithmetic and geometric average returns for the stock? - answer
arithmetic: 9.17%
geometric: 8.14%
To convince investors to accept greater volatility, you must: - answer increase the
risk premium.
Small-company stocks, as the term is used in the textbook, are best defined as the: -
answer smallest 20 percent of the companies listed on the NYSE.
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? - answer Risk premium
Which one of the following categories of securities had the most volatile annual returns
over the period 1926-2016? - answer Small-company stocks
Generally speaking, which of the following best correspond to a wide frequency
distribution? - answer High standard deviation, large risk premium
Standard deviation is a measure of which one of the following? - answer volatility
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. - answer overestimate; underestimate
The average compound return earned per year over a multiyear period is called the
_____ average return. - answer geometric
The return earned in an average year over a multiyear period is called the _____
average return. - answer arithmetic
, 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?
- answer Efficient capital market
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. - answer The information was expected.
Which one of the following statements is correct concerning market efficiency?
Real asset markets are more efficient than financial markets.
If a market is efficient, arbitrage opportunities should be common.
In an efficient market, some market participants will have an advantage over others.
A firm will generally receive a fair price when it issues new shares of stock if the market
is efficient.
New information will gradually be reflected in a stock's price to avoid any sudden price
changes in an efficient market. - answer A firm will generally receive a fair price
when it issues new shares of stock if the market is efficient.
Efficient financial markets fluctuate continuously because: - answer the markets are
continually reacting to new information.
Inside information has the least value when financial markets are: - answer strong
form efficient
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. - answer
strong
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? - answer 3.65 percent
Real return = [(1.0635)/(1.026)] − 1
Real return = .0365, or 3.65%
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? - answer 1.54
percent
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