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Exam 12: Some Lessons From Capital Market History

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Question 1

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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.

F) C) and D)
G) A) and C)

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Question 2

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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.

F) A) and D)
G) A) and C)

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Question 3

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What is the amount of the risk premium on a U.S.Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

To convince investors to accept greater volatility,you must:

Over the past fifteen years,the common stock of The Flower Shoppe,Inc.has produced an arithmetic average return of 12.2 percent and a geometric average return of 11.5 percent.What is the projected return on this stock for the next five years according to Blume's formula?

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?

How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?

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?

Suppose you bought a 10 percent coupon bond one year ago for $950.The face value of the bond is $1,000.The bond sells for $985 today.If the inflation rate last year was 9 percent,what was your total real rate of return on this investment?

Which one of the following statements is correct?

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?

Assume that the returns from an asset are normally distributed.The average annual return for the asset is 18.1 percent and the standard deviation of the returns is 32.5 percent.What is the approximate probability that your money will triple in value in a single year?

A stock had annual returns of 3.6 percent,-8.7 percent,5.6 percent,and 12.5 percent over the past four years.Which one of the following best describes the probability that this stock will produce a return of 22 percent or more in a single year?

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.

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?

Which one of the following is defined by its mean and its standard deviation?

Today,you sold 200 shares of Indian River Produce stock.Your total return on these shares is 6.2 percent.You purchased the shares one year ago at a price of $31.10 a share.You have received a total of $100 in dividends over the course of the year.What is your capital gains yield on this investment?

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.

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?