Practice Questions: Capital Market History: Risk and Return – Flashcards

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

2. 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

3. 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

4. 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

5. 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

6. 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.

7. 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.

8. 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

9. 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)

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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