Chapter 12 Lessons from Capital Market History

1. Investors shouldn't count capital gains as part of total

returns until the security is sold, since the capital gain is
really only a "paper gain" up to that point.

True False

2. The total return on a security is made up of two

components: the capital gains component and the price
appreciation component.

True False

3. In general, the longer the term of an investment the

lower the risk premium will be.

True False

4. On the basis of historical data from the 1957-2005

period, the return on the average Treasury bill has
fluctuated more than the return on the average long
bond.

True False

5. On the basis of historical data from the 1948-2002

period, the return on the average common stock has
fluctuated less than the return on the average stock of
small firms.

True False

6. A growth stock is a stock that results in a high return

with relatively low levels of risk.

True False

7. Generally speaking, financial markets are less efficient

than real asset markets.

True False

8. Your classmate just made $10,000 in a single day by

trading in the stock market. It is reasonable to conclude,
therefore, that the efficient market hypothesis cannot be
true.

True False
9. On most days, you notice that stock prices fluctuate
wildly. It is obvious to you that markets are inefficient
during this period.

True False

10. Capital market efficiency is attributable largely to the

lack of competition among market participants for
information.

True False

11. If insiders were allowed to profit on their inside

information without penalty, financial markets would
be less efficient.

True False

12. The excess return required on a risky asset over that

earned on a risk-free asset is called a:

A.
B.
C.
D.
E.

13. The average squared difference between the actual

return and the average return is the:

A.
B.
C.
D.
E.

14. The standard deviation for a set of stock returns can be

calculated as:

A.
B.
C.
D.
E.
15. A symmetric, bell-shaped statistical distribution that is
completely defined by its mean and standard deviation
is the _______________ distribution.

A.
B.
C.
D.
E.

16. An efficient capital market is one in which:

A.
B.
C.
D.
E.

17. The notion that actual capital markets, such as the TSX,
are fairly priced is called the:

A.
B.
C.
D.
E.

18. The hypothesis that market prices reflect all available

information is called efficiency in the:

A.
B.
C.
D.
E.

19. The hypothesis that market prices reflect all publicly-

available information is called efficiency in the:

A.
B.
C.
D.
E.
20. The hypothesis that market prices reflect all historical
information is called efficiency in the:

A.
B.
C.
D.
E.

21. Risk premium is defined as:

A.
B.
C.
D.
E.

22. (Dt+1/Pt) + [(Pt+1 - Pt)/Pt] is the mathematical expression

for the:

A.
B.
C.
D.
E.

23. The dollar rate of return on an investment can be

mathematically defined as:

A.
B.
C.
D.
E.

24. The 95% probability range for returns is defined as the:

A.
B.
C.
D.
E.
25. The square of the standard deviation is called the:

A.
B.
C.
D.
E.

26. The three probability ranges used with a normal

distribution are defined as the _____ ranges.

A.
B.
C.
D.
E.

27. For a stock that does not pay a dividend, the total return
can also be defined as the:

A.
B.
C.
D.
E.

28. A normal distribution is a statistical distribution that is

defined by its:

A.
B.
C.
D.
E.

29. If a company insider uses all of her knowledge about

the company stock and still has no advantage in the
marketplace over outside investors, the market has to
be:

A.
B.
C.
D.
E.
30. An efficient market is defined as one where all
investments in that market are ____ investments.

A.
B.
C.
D.
E.

31. An asset's return on investment has two components,

one of which is ____________, which reflects the cash
you receive directly while you own the investment.

A.
B.
C.
D.
E.

32. Which of the following correctly completes this

sentence: When calculating your return on investment
you should ignore _____________.

A.
B.
C.
D.
E.

33. Last year you purchased 100 shares of Marvel

Entertainment stock for $12 per share. According to
today's quote in The National Post, the stock is
currently selling for $18 per share. The stock pays no
dividends. Your return on this investment is comprised
of _____________________.

A.
B.
C.
D.
E.
34. Based on the historical record from 1957 to 2005,
which of the following types of Canadian securities
earned the SECOND highest return?

A.
B.
C.
D.
E.

35. Which of the following investments have grown faster

than the rate of inflation over the period 1957-2005?

I. Canadian common stocks

II. Treasury bills
III. Long bonds
IV. Small stocks

A.
B.
C.
D.
E.

36. Over the past 50 years, which of the following

Canadian investments has provided the largest average
return?

A.
B.
C.
D.
E.

37. Over the past 50 years, which of the following

investments has provided the smallest average return?

A.
B.
C.
D.
E.
38. Over the past 50 years, which of the following
investments has been considered the most risky?

A.
B.
C.
D.
E.

39. Over the past 50 years, which of the following

investments has been the least risky?

A.
B.
C.
D.
E.

40. Which of the following statements about historical

security returns is/are true?

I. Stocks of small companies have higher average

returns than those of larger companies.
II. Risky securities have higher average returns than
riskless securities.
III. Long bonds have higher average yields than
Treasury bills.
IV. Historical information about capital markets is
useful for drawing conclusions about the relationship
between risk and return.

A.
B.
C.
D.
E.

41. Why do long-term government bonds have a risk

premium?

A.
B.
C.
D.
E.
42. Which of the following is true about risk and return?

A.
B.
C.
D.
E.

43. Which of the following is true?

A.
B.
C.
D.
E.

44. Which of the following is likely to be associated with

the highest level of risk?

A.
B.
C.
D.
E.

45. Which of the following is generally considered to

represent the risk-free return?

A.
B.
C.
D.
E.

46. Over the 1957-2005 period, the risk premium on long

bonds has averaged ________ per year.

A.
B.
C.
D.
E.
47. Over the 1970-2005 period, the risk premium on small
stocks has averaged ________ per year.

A.
B.
C.
D.
E.

48. Over the 1957-2005 period, the risk premium on

Canadian common stocks has averaged ______ per
year.

A.
B.
C.
D.
E.

49. You are considering two investments. You note that the
return on investment A tends to vary quite widely from
its average, definitely more so than does investment B.
Based on this, you believe that:

A.
B.
C.
D.
E.

50. _________________ is one of the most commonly used

measures of return volatility.

A.
B.
C.
D.
E.
51. Over the 1957-2005 period, the standard deviation of
returns for Canadian common stocks has averaged
_________ per year.

A.
B.
C.
D.
E.

52. Over the 1970-2005 period, the standard deviation of

returns for small stocks has averaged ______________
per year.

A.
B.
C.
D.
E.

53. Over the 1957-2005 period, the standard deviation of

returns for long bonds has averaged ___________ per
year.

A.
B.
C.
D.
E.

54. The normal distribution is useful in analyzing security

returns because:

A.
B.
C.
D.
E.
55. The lessons from capital market history tell us:

I. There is a reward for bearing risk.

II. The greater the potential reward from a risky asset,
the greater is the risk.
III. The TSX is an inefficient market.

A.
B.
C.
D.
E.

56. If capital markets are efficient, then

________________________.

A.
B.
C.
D.
E.

57. Which of the following is NOT correct with regards to

the Efficient Markets Hypothesis?

A.
B.
C.
D.
E.

58. Which form(s) of market efficiency is/are generally

considered to hold in well-organized markets?

I. Strong form efficiency

II. Semi-strong form efficiency
III. Weak form efficiency

A.
B.
C.
D.
E.
59. Which of the following is implied by the evidence
regarding market efficiency?

A.
B.
C.
D.
E.

60. Assume that markets are semi-strong form efficient.

Suppose, then, that during a trading day, important new
information is released for the first time concerning a
certain company. This information indicates that one of
the firm's oil fields, previously thought to be very
promising, just came up dry. How would you expect the
price of a share of stock to react to this information?

A.
B.
C.
D.
E.

61. IBM announces that earnings per share for the current
quarter are $1.25; this figure is barely half of what
investors and analysts expected. In an efficient market,
the price of IBM stock will:

A.
B.
C.
D.
E.

62. Suppose you purchase a stock expecting the price to

rise in the coming year. After one year, your stock has
actually decreased in value, due primarily to adverse
information released during the year. Which of the
following describes this result?

A.
B.
C.
D.
E.
63. You discover that you can make greater than expected
returns by buying stock in firms whenever the growth
rate in sales predicted by an investment survey exceeds
the stock's current price-earnings ratio. Which of the
following describes this event?

A.
B.
C.
D.
E.

64. You discover you can make above normal returns if you
buy oil-company stocks just before noon on any given
trading day and then sell them immediately before the
market closes that same day. Which of the following
describes this event?

A.
B.
C.
D.
E.

65. An efficient market implies

_________________________.

A.
B.
C.
D.
E.

66. Which of the following statements about market

efficiency is generally considered to be true?

A.
B.
C.
D.
E.
67. Which of the following is NOT correct about market
efficiency?

A.
B.
C.
D.
E.

68. You have discovered from looking at charts of past

stock prices that if you buy just after a stock price has
declined for three consecutive days, you make money
every time! This is a violation of ________ market
efficiency.

A.
B.
C.
D.
E.

69. In efficient markets, investments have which of the

following attributes?

I. Expected return equal to zero

II. Expected NPV equal to zero
III. Expected risk premium equal to zero

A.
B.
C.
D.
E.
70. Driving in your car, you hear that Microsoft has
announced that they have cornered the market on
Internet technology. Knowing this is great news for
Microsoft, when you arrive at a phone 30 minutes later
you call your broker and are able to buy Microsoft
stock before its price moves up on the news. This is a
violation of ___________ market efficiency.

A.
B.
C.
D.
E.

71. While eating in an exclusive restaurant in New York

City, you overhear two executives negotiating a merger.
When you check the news about the two companies
after lunch you find there is no public information
about any merger. Thus, you buy shares of stock in both
firms and make a killing when the merger is announced
publicly two days later. This is a violation of
______________ market efficiency.

A.
B.
C.
D.
E.

72. The market return on the Canadian Treasury bill is

generally used as the measure of the:

A.
B.
C.
D.
E.

73. The nominal rate of return on large-company stocks

consists of a:

A.
B.
C.
D.
E.
74. Which of the following are included in the market
prices if the market is semi-strong efficient?

I. All historical information

II. All insider information
III. All public information
IV. All information of any kind

A.
B.
C.
D.
E.

75. If the stock market is weak form efficient, then an

investor can NOT earn excess profits by:

A.
B.
C.
D.
E.

76. If a market is efficient, then the difference between the

market value of an investment and its cost is:

A.
B.
C.
D.
E.

77. Last year you purchased a stock at $21.63 a share.

Today you sold your shares at $23.01 after receiving
your quarterly dividend. The total return on this stock
consists of:

A.
B.
C.
D.
E.
78. Which one of the following has the highest risk
premium based on historical information?

A.
B.
C.
D.
E.

79. Historical information has shown that there is ______

relationship between the rate of return and the risk of an
investment.

A.
B.
C.
D.
E.

80. You are an investor who studies the price movements of

stock to identify patterns that are repetitive. By doing
this, you have been able to earn higher returns than
normal. This would be a violation of:

A.
B.
C.
D.
E.

81. The higher the standard deviation of a stock the:

A.
B.
C.
D.
E.
82. Which one of the following types of investments would
be associated with the narrowest bell curve?

A.
B.
C.
D.
E.

83. Which of the following statements concerning

probability ranges of a normal distribution is (are)
correct?

I. The 99% probability range is equal to the mean plus

or minus three times the variance.
II. With a mean of 5% and a standard deviation of 10%,
the probability of earning more than 25% in any one
year is no more than 2.5%.
III. If the lowest return for a 68% probability range is -
21%, then there is a 32% chance that the loss in any one
year will be greater than 21%.
IV. The mean is equal to the average variance of an
investment over a period of time.

A.
B.
C.
D.
E.

84. The variance is the:

A.
B.
C.
D.
E.

85. Which one of the following categories has the lowest

positive, non-zero, risk premium?

A.
B.
C.
D.
E.
86. Which one of the following statements is true
concerning market performance over the period 1957-
2005?

A.
B.
C.
D.
E.

87. The historical record demonstrates that the risk of loss

decreases when the _____ increases.

A.
B.
C.
D.
E.

88. Which of the following statements is (are) true

concerning risk and return?

I. To accept higher levels of risk, investors must be paid

a higher risk premium.
II. Small-company stocks offer a higher return and less
risk than large-company stocks.
III. The risk-free rate of return is based on the long-term
government bond rate.
IV. The higher the standard deviation, the less
predictable the rate of return in any one year.

A.
B.
C.
D.
E.

89. The frequency distribution of large-company stocks

since 1957 shows that:

A.
B.
C.
D.
E.
90. The total of the deviations of actual returns from the
average return will:

A.
B.
C.
D.
E.

91. Which one of the following statements is correct

concerning the historical standard deviations of asset
classes over the period 1957-2005?

A.
B.
C.
D.
E.

92. You purchased a bond on January 1, 2002 for $839.67.

The bond has a $1,000 face value, an 8% annual
coupon, and can be sold for $842.33 on December 31,
2002. What is your total dollar return for the year?

A.
B.
C.
D.
E.

93. You purchased 200 shares of preferred stock on January

1, 2002 for $42.27 per share. The stock pays an annual
dividend of $7 per share. On December 31, 2002 the
market price is $46.88 per share. What is your total
dollar return for the year?

A.
B.
C.
D.
E.
94. You purchased a bond on January 1, 2002 for $839.67.
The bond has a $1,000 face value, an 8% annual
coupon, and can be sold for $822.33 on December 31,
2002. What is your percentage return on investment for
the year?

A.
B.
C.
D.
E.

95. You purchased 200 shares of preferred stock on January

1, 2002 for $42.27 per share. The stock pays an annual
dividend of $5 per share. On December 31, 2002 the
market price is $43.88 per share. What is your
percentage return on investment for the year?

A.
B.
C.
D.
E.

96. You purchased a bond for $900 one year ago. Today,
you receive your only interest payment for the year of
$100. The bond can currently be sold for $975. What is
your total percentage return on investment? Ignore tax
effects.

A.
B.
C.
D.
E.

97. An investment earned the following returns for the

years 2003 through 2006:-20%, 50%, 30%, and 10%.
What is the variance of returns for this investment?

A.
B.
C.
D.
E.
98. Given the following historical returns, what is the
variance? Year 1 = 8%; year 2 = -12%; year 3 = 6%;
year 4 = 1%; year 5 = -19%.

A.
B.
C.
D.
E.

99. Given the following historical returns, what is the

standard deviation? Year 1 = 20%; year 2 = -12%; year
3 = 16%; year 4 = 3%; year 5 = -15%.

A.
B.
C.
D.
E.

100. Given the following returns, what is the variance? Year

1 = 15%; year 2 = 3%; year 3 = -29%; year 4 = -1%.

A.
B.
C.
D.
E.

101. Over the last three years you earned 5%, 7%, and 9%.
What is the standard deviation of your returns?

A.
B.
C.
D.
E.
102. Which of the following two stocks is more volatile
based on historical returns?

A.
B.
C.
D.
E.

103. If we assume that the annual return on common stocks

are normally distributed, then approximately 95% of the
returns will fall within the range ___________% if the
average historical return is 13.2% with a standard
deviation of 20.3%.

A.
B.
C.
D.
E.

104. What is the total dollar return for the investment?

A.
B.
C.
D.
E.

105. What is the capital gains yield for the investment?

A.
B.
C.
D.
E.
106. What is the dividend yield for the investment?

A.
B.
C.
D.
E.

107. What is the total percentage return for the investment?

A.
B.
C.
D.
E.

108. What is the total dollar return for the investment?

A.
B.
C.
D.
E.

109. What is the capital gains yield for the investment?

A.
B.
C.
D.
E.

110. What is the dividend yield for the investment?

A.
B.
C.
D.
E.
111. What is the total percentage return for the investment?

A.
B.
C.
D.
E.

Use the following historical average returns and

standard deviations to answer the question below.

112. What is the historical risk premium on Canadian

common stocks?

A.
B.
C.
D.
E.

113. What is the historical risk premium of Canadian

common stocks over long bonds?

A.
B.
C.
D.
E.

114. Based on the historical data above, what is your reward

for bearing risk of owning small-company stocks rather
than Canadian common stocks?

A.
B.
C.
D.
E.
115. If the returns on small-company stocks are normally
distributed, which of the following returns would lie in
a 99% confidence interval around the mean, but not in a
95% confidence interval?

A.
B.
C.
D.
E.

116. Assume the return on T-bills is normally distributed.

Assuming a 68% probability, what is the highest return
you would expect to earn on T-bills?

A.
B.
C.
D.
E.

117. Marti purchased a stock one year ago at a price of

$23.89. Over the past year she has received a total of
$1.63 in dividends. Today she sold the stock for $22.84.
What percentage total return did Marti earn on this
investment?

A.
B.
C.
D.
E.

118. Sam purchased a stock for $46.91 one year ago. Today
he sold the stock for $48.03. The stock paid a total of
$1.40 in dividends over the year. What capital gains
yield did Sam realize on this investment?

A.
B.
C.
D.
E.
119. Frederico paid $86.70 for a stock one year ago. Today
he sold the stock for $88.20. Over the year, Frederico
received four quarterly dividends of $0.60 each. What
was the dividend yield on this investment?

A.
B.
C.
D.
E.

120. A stock produced total returns of 10.4%, -11.9%, -

21.7%, and 31.2% over the past four years,
respectively. What is the average rate of return for this
period of time?

A.
B.
C.
D.
E.

121. A stock produced total returns of 9.78%, 13.61%,

1.19%, and -4.90% over the past four years,
respectively. What is the variance on this set of
returns?

A.
B.
C.
D.
E.

122. You purchased a five-year 6% annual coupon bond one

year ago for $990. You sold the bond today when the
market rate of return is 4.5%. If the inflation rate for the
past year was 2.0%, what nominal rate of return did you
earn on this investment?

A.
B.
C.
D.
E.
123. Angelo purchased a 7% annual coupon bond one year
ago for $987. At the time of purchase, the bond had six
years to maturity. Over the past year inflation has been
3.2%. The market required return on this bond today is
8%. If Angelo sells the bond today at the market price,
what real rate of return will he realize on this
investment?

A.
B.
C.
D.
E.

124. A stock produced total returns of 11.5%, 8.3%, and -

2.4% over the past three years, respectively. Based on
this information what range of returns would you
expect to see 95% of the time?

A.
B.
C.
D.
E.

125. ABC stock pays a $1.80 annual dividend. The market

price of the stock was $21.74, $19.83, $22.60, and
$23.10 at the end of the past four years, respectively.
Based on this information, what is the mean rate of
return?

A.
B.
C.
D.
E.
126. A stock has an average rate of return of 11.5% and a
standard deviation of 12.8%. What is the probability
that the stock will lose more than 26.9% in any one
year?

A.
B.
C.
D.
E.

127. Assume that for some period of time corporate bonds

had an average rate of return of 5.4% while Treasury
bills returned 2.8% and inflation averaged 2.7%. Given
these assumptions, what is the risk premium on
corporate bonds?

A.
B.
C.
D.
E.

128. Fred made the following rates of return on his portfolio

over the past five years. The T-Bill rate and the inflation
rate for each year are also shown. Based on this
information, in which year did Fred have the highest
real rate of return?

A.
B.
C.
D.
E.
129. Over the past four years a stock produced annual
returns of 4%, -18%, - 21%, and 48%, respectively.
Based on this information, what is the standard
deviation for this stock?

A.
B.
C.
D.
E.

130. Over the past five years a stock produced annual returns
of 11%, 16%, 5%, 2%, and 9%, respectively. Based on
this information, what is the standard deviation for this
stock?

A.
B.
C.
D.
E.

131. One year ago, Yokino purchased 100 shares of stock for
$3,896. Since that time, he has received a total of $180
in dividends. If he sells the stock at today's market price
he will realize a total return on his investment of
10.37%. Assuming he sells the stock today, what is the
dollar amount of his capital gain per share of stock?

A.
B.
C.
D.
E.

132. One year ago, Kyra purchased a ten-year 5% corporate

bond for $986. The bond is currently selling for $1,002.
If Kyra sells the bond today, what is the dollar amount
of the total return she would realize on this investment?

A.
B.
C.
D.
E.
133. You purchased a stock one year ago for $91.20. Today
you sold the stock and realized a total return of -63.7%
on your investment. During the year you received a
total of $2.28 in dividends. At what price did you sell
the stock?

A.
B.
C.
D.
E.

134. You purchased a stock for $47.00 a share one year ago.
Today you sold the stock for $50.21 a share and
realized an 8.51% total rate of return. What was the
dividend yield on this stock for the past year?

A.
B.
C.
D.
E.

135. An investor purchased a stock for $1.61 per share, held

it for one year, and sold it for $3.03 a share. The stock
did not pay a dividend. Inflation for that year was 3.2%
and Treasury bills returned 3.7%. What is the real rate
of return on this investment?

A.
B.
C.
D.
E.

136. The average compound return earned per year over a

multi-year period is called the _____ average return.

A.
B.
C.
D.
E.
137. The return earned in an average year over a multi-year
period is called the _____ average return.

A.
B.
C.
D.
E.

138. The total percentage return on an equity investment is

computed using the formula ______, where P1 is the
purchase cost, P2 represents the sale proceeds, and d is
the dividend income.

A.
B.
C.
D.
E.

139. The dividend yield is equal to _____, where P1 is the

purchase cost, P2 represents the sale proceeds, and d is
the dividend income.

A.
B.
C.
D.
E.

140. The Zolo Co. just declared that they are increasing their
annual dividend from $1.00 per share to $1.25 per
share. If the stock price remains constant, then:

A.
B.
C.
D.
E.
141. The dollar amount of the capital gain on an investment
is computed as _____, where P1 is the purchase cost, P2
represents the sale proceeds, and d is the dividend
income.

A.
B.
C.
D.
E.

142. The capital gains yield plus the dividend yield on a

security is called the:

A.
B.
C.
D.
E.

143. The real rate of return on a stock is approximately equal

to the nominal rate of return:

A.
B.
C.
D.
E.

144. As long as the inflation rate is positive, the real rate of

return on a security investment will be ____ the
nominal rate of return.

A.
B.
C.
D.
E.
145. A portfolio of large company stocks would contain
which one of the following types of securities?

A.
B.
C.
D.
E.

146. $1 invested in Canadian Treasury bills in 1957 would

have increased in value to approximately ____ by
2005.

A.
B.
C.
D.
E.

147. Which one of the following is a correct ranking of

securities based on their volatility over the period of
1957 to 2005? Rank from highest to lowest.

A.
B.
C.
D.
E.

148. $1 invested in large company stocks in 1957 would

have increased in value to approximately _____ by
2005.

A.
B.
C.
D.
E.
149. Which one of the following is a correct statement
concerning risk premium?

A.
B.
C.
D.
E.

150. The risk premium is computed by ______ the average

return for the investment.

A.
B.
C.
D.
E.

151. The excess return you earn by moving from a relatively

risk-free investment to a risky investment is called the:

A.
B.
C.
D.
E.

152. To convince investors to accept greater volatility in the

annual rate of return on an investment, you must:

A.
B.
C.
D.
E.

153. Which one of the following takes the shape of a bell

curve?

A.
B.
C.
D.
E.
154. Which of the following statements are correct
concerning the variance of the annual returns on an
investment?

I. The larger the variance, the more the actual returns

tend to differ from the average return.
II. The larger the variance, the larger the standard
deviation.
III. The larger the variance, the greater the risk of the
investment.
IV. The larger the variance, the higher the expected
return.

A.
B.
C.
D.
E.

155. The variance of returns is computed by dividing the

sum of the:

A.
B.
C.
D.
E.

156. Which of the following statements concerning the

standard deviation are correct?

I. The greater the standard deviation, the lower the risk.

II. The standard deviation is a measure of volatility.
III. The higher the standard deviation, the less certain
the rate of return in any one given year.
IV. The higher the standard deviation, the higher the
expected return.

A.
B.
C.
D.
E.
157. Estimates using the arithmetic average will probably
tend to _____ values over the long-term while estimates
using the geometric average will probably tend to
_____ values over the short-term.

A.
B.
C.
D.
E.

158. In an efficient market, the price of a security will:

A.
B.
C.
D.
E.

159. If the financial markets are efficient, then investors

should expect their investments in those markets to:

A.
B.
C.
D.
E.

160. Which one of the following statements is correct

concerning market efficiency?

A.
B.
C.
D.
E.

161. Financial markets fluctuate daily because they:

A.
B.
C.
D.
E.
162. Insider trading does not offer any advantages if the
financial markets are:

A.
B.
C.
D.
E.

163. According to theory, studying historical prices in order

to identify mispriced stocks will not work in markets
that are _____ efficient.

I. weak-form
II. semi-strong-form
III. strong-form

A.
B.
C.
D.
E.

164. Which of the following tend to reinforce the argument

that the financial markets are efficient?

I. Information spreads rapidly in today's world.

II. There is tremendous competition in the financial
markets.
III. Market prices continually fluctuate.
IV. Market prices react suddenly to unexpected news
announcements.

A.
B.
C.
D.
E.
165. If you excel in analyzing the future outlook of firms,
you would prefer that the financial markets be ____
form efficient so that you can have an advantage in the
marketplace.

A.
B.
C.
D.
E.

166. Your best friend works in the finance office of the Delta
Corporation. You are aware that this friend trades Delta
stock based on information he overhears in the office.
You know that this information is not known to the
general public. Your friend continually brags to you
about the profits he earns trading Delta stock. Based on
this information, you would tend to argue that the
financial markets are at best _____ form efficient.

A.
B.
C.
D.
E.

167. The U.S. Securities and Exchange Commission

periodically charges individuals for insider trading and
claims those individuals have made unfair profits.
Based on this fact, you would tend to argue that the
financial markets are at best _____ form efficient.

A.
B.
C.
D.
E.

168. Individuals that continually monitor the financial

markets seeking mispriced securities:

A.
B.
C.
D.
E.
169. One year ago, you purchased a stock at a price of
$32.50. The stock pays quarterly dividends of $.40 per
share. Today, the stock is worth $34.60 per share. What
is the total amount of your dividend income to date
from this investment?

A.
B.
C.
D.
E.

170. Six months ago, you purchased 100 shares of stock in

ABC Co. at a price of $43.89 a share. ABC stock pays a
quarterly dividend of $.10 a share. Today, you sold all
of your shares for $45.13 per share. What is the total
amount of your capital gains on this investment?

A.
B.
C.
D.
E.

171. A year ago, you purchased 300 shares of IXC

Technologies, Inc. stock at a price of $9.03 per share.
The stock pays an annual dividend of $.10 per share.
Today, you sold all of your shares for $28.14 per share.
What is your total dollar return on this investment?

A.
B.
C.
D.
E.

172. Winslow, Inc. stock is currently selling for $40 a share.

The stock has a dividend yield of 3.8%. How much
dividend income will you receive per year if you
purchase 500 shares of this stock?

A.
B.
C.
D.
E.
173. One year ago, you purchased a stock at a price of $32 a
share. Today, you sold the stock and realized a total
return of 25%. Your capital gain was $6 a share. What
was your dividend yield on this stock?

A.
B.
C.
D.
E.

174. You just sold 200 shares of Langley, Inc. stock at a

price of $38.75 a share. Last year you paid $41.50 a
share to buy this stock. Over the course of the year, you
received dividends totaling $1.64 per share. What is
your capital gain on this investment?

A.
B.
C.
D.
E.

175. You purchased 300 shares of Deltona, Inc. stock for

$44.90 a share. You have received a total of $630 in
dividends and $14,040 in proceeds from selling the
shares. What is your capital gains yield on this stock?

A.
B.
C.
D.
E.

176. Today, you sold 200 shares of SLG, Inc. stock. Your
total return on these shares is 12.5%. You purchased the
shares one year ago at a price of $28.50 a share. You
have received a total of $280 in dividends over the
course of the year. What is your capital gains yield on
this investment?

A.
B.
C.
D.
E.
177. Eight months ago, you purchased 400 shares of
Winston, Inc. stock at a price of $54.90 a share. The
company pays quarterly dividends of $.50 a share.
Today, you sold all of your shares for $49.30 a share.
What is your total percentage return on this
investment?

A.
B.
C.
D.
E.

178. Seven months ago, you purchased a stock at a price of

$36.04 a share. Today, you sold those shares for $43.15
a share. During the past seven months, you have
received dividends totaling $0.24 a share while inflation
has averaged 3.6%. What is your approximate real rate
of return on this investment?

A.
B.
C.
D.
E.

179. A stock has an expected rate of return of 8.3% and a

standard deviation of 6.4%. Which one of the following
best describes the probability that this stock will lose
11% or more in any one given year?

A.
B.
C.
D.
E.

180. What are the arithmetic and geometric average returns

for a stock with annual returns of 21%, 8%, -32%, 41%,
and 5%?

A.
B.
C.
D.
E.
181. A stock had returns of 6%, 13%, -11%, and 17% over
the past four years. What is the geometric average
return for this time period?

A.
B.
C.
D.
E.

182. A stock had the following prices and dividends. What is

the geometric average return on this stock?

A.
B.
C.
D.
E.

183. The risk premium of an asset is defined as the return on

the asset in excess of the:

A.
B.
C.
D.
E.

184. The variance is defined as the:

A.
B.
C.
D.
E.
185. The geometric average return is defined as the _____
over a multi-year period.

A.
B.
C.
D.
E.

186. The arithmetic average return is defined as the _____

over a multiyear period.

A.
B.
C.
D.
E.

187. The semi-strong form of market efficiency is best

described as a market where _____ reflected in the
current security prices.

A.
B.
C.
D.
E.

188. The total return on a security is computed as the

summation of the dividend income and the capital gain
expressed as a percentage of the security's:

A.
B.
C.
D.
E.
189. The dividend yield is computed as the annual dividend
in year t + 1 divided by the:

A.
B.
C.
D.
E.

190. Which of the following will increase the dividend yield

on a stock at time t?

I. an increase in the dividend for time t + 1

II. a decrease in the market value of the security at time
t
III. a decrease in the market value of the security at
time t + 1
|IV. an increase in the market value of the security at
time t + 1

A.
B.
C.
D.
E.

191. The capital gains yield on a security:

A.
B.
C.
D.
E.

192. The nominal rate of return minus the inflation rate is

called the:

A.
B.
C.
D.
E.
193. Over the period of 1970-2005, small-company stocks:

A.
B.
C.
D.
E.

194. Treasury bills:

A.
B.
C.
D.
E.

195. Based on the period 1957-2005, the standard deviation:

A.
B.
C.
D.
E.

196. Which one of the following categories of securities has

the highest average risk premium?

A.
B.
C.
D.
E.

197. Over the long-term, the greater the volatility in the

returns on a risky security the:

A.
B.
C.
D.
E.
198. Which of the following statements concerning the
standard deviation are correct?

I. The standard deviation measures the volatility of a

security's returns.
II. The standard deviation can be negative, positive, or
equal to zero.
III. The 95% probability range is equal to the mean plus
or minus three standard deviations.
IV. The lower the standard deviation, the lower the level
of risk.

A.
B.
C.
D.
E.

199. If the securities market is strong-form efficient, then:

A.
B.
C.
D.
E.

200. In an efficient market:

A.
B.
C.
D.
E.

201. If capital markets are semi-strong form efficient, then:

A.
B.
C.
D.
E.
202. One year ago, Tina purchased 200 shares of Addado
Companies at a cost of $38.90 a share. The stock pays
quarterly dividends of $.65 per share. Today, Tina sold
her shares for $41.20 per share. How much dividend
income did Tina receive as a result of her ownership of
these shares?

A.
B.
C.
D.
E.

203. Eight months ago, Turner purchased 100 shares of

Delta Frames stock at a price of $47.08 a share. Delta
pays a quarterly dividend of $1.10 a share. Today,
Turner sold all of his shares for $48.63 per share. What
is Turner's total capital gain on this investment?

A.
B.
C.
D.
E.

204. One year ago, you purchased 600 shares of Westover

Paints stock at a price of $3.68 per share. The stock
pays an annual dividend of $.02 per share. Today, you
sold all of your shares for $11.21 per share. What is
your total dollar return on this investment?

A.
B.
C.
D.
E.
205. Last year, Sylvia purchased 300 shares of Webster
Companies stock at a price of $40.27 per share. Today,
those shares are valued at $38.20 a share. Over the last
year, Sylvia received total dividend income of $450.
What is the current dividend yield on Webster stock if
the firm pays a constant dividend?

A.
B.
C.
D.
E.

206. Analog, Inc. stock is currently selling for $16.92 a

share. The stock has a dividend yield of 1.3%. How
much dividend income will you receive per year if you
purchase 600 shares of this stock?

A.
B.
C.
D.
E.

207. One year ago, Stephen purchased 100 shares of K&L

stock at a price of $18 a share. Today, he sold the stock
and realized a total return of 20%. His capital gain was
$3.60 a share. What is the current dividend yield on this
stock?

A.
B.
C.
D.
E.
208. You just sold 450 shares of Zeus, Inc. stock at a price of
$51.90 a share. Last year, you paid $36.20 a share when
you bought them. Over the course of the year, you
received dividends totaling $2.10 per share. What is
your capital gain on this investment?

A.
B.
C.
D.
E.

209. You purchased 500 shares of Brown Stone stock for

$41.80 a share. You have received a total of $820 in
dividends and $7,280 in proceeds from selling the
shares. What is your capital gains yield on this stock?

A.
B.
C.
D.
E.

210. Today, you sold 700 shares of RZX stock. Your total
return on these shares is 16.2%. You purchased the
shares one year ago at a price of $33.40 a share. You
received a total of $770 in dividends over the course of
the year. What is your capital gains yield on this
investment?

A.
B.
C.
D.
E.
211. Six months ago, you purchased 250 shares of QE stock
for $18.67 a share. You received dividend payments
equal to $.45 a share. Today, you sold all of your shares
for $15.40 a share. What is your total dollar return on
this investment?

A.
B.
C.
D.
E.

212. Nine months ago, you purchased 350 shares of

Southland, Inc. stock at a price of $62.47 a share. The
company pays quarterly dividends of $.85 a share.
Today, you sold all of your shares for $67.82 a share.
What is your total percentage return on this
investment?

A.
B.
C.
D.
E.

213. Last year, Marsha purchased a stock at a price of

$21.36 a share. Over the course of the year, she
received $.60 in dividends per share while inflation
averaged 3.2%. Today, Marsha sold her shares for
$22.80 a share. What is Marsha's real rate of return on
this investment?

A.
B.
C.
D.
E.
214. One year ago, Valerie purchased a stock at a price of
$26 a share. Today, she sold those shares for $26.50 a
share. During the past year, she received dividends
totaling $0.50 a share while inflation averaged 2.8%.
What is Valerie's real rate of return on this investment?

A.
B.
C.
D.
E.

215. A stock returned 14%, -22%, 3%, and 34% over the
past four years, respectively. What is the standard
deviation of this stock based on the past four years?

A.
B.
C.
D.
E.

216. Leah Merryweather stock has an expected rate of return

of 12.5% and a standard deviation of 26.3%. Which one
of the following best describes the probability that this
stock will lose 40% or more in any one given year?

A.
B.
C.
D.
E.

217. Theta stock returned 2%, -5%, 12%, and 28% for the
past four years, respectively. Based on this information,
what is the 95% probability range of returns for any one
given year?

A.
B.
C.
D.
E.
218. Over the past five years, Redstone Enterprises produced
returns of 31%, 38%, -41%, 8%, and 15%. The mean of
these returns is _____% and the standard deviation is
_____%.

A.
B.
C.
D.
E.

219. Treadwell Motors stock returned 11%, 14%, 3%, and

9% over the past 4 years, respectively. The arithmetic
average return for this period is _____%.

A.
B.
C.
D.
E.

220. The common stock of Petersen and White Importers

yielded returns of 42%, -5%, -18%, 9%, and 12% over
the past 5 years, respectively. The arithmetic average
return for this period of time is _____% while the
geometric average return is _____%.

A.
B.
C.
D.
E.

221. A stock had returns of 8%, 11%, -2%, 5%, and 13%
over the past 5 years, respectively. What is the
geometric average rate of return for this time period?

A.
B.
C.
D.
E.
222. LK Pattern Shops had the following prices and
dividends for the past 4 years. What is the geometric
average rate of return on this stock based on this period
of time?

A.
B.
C.
D.
E.

223. One year ago, you purchased a stock at a price of

$28.75. The stock pays quarterly dividends of $.35 per
share. Today, the stock is worth $31.25 per share. What
is the total amount of your capital gains to date from
this investment?

A.
B.
C.
D.
E.

224. Six months ago, you purchased 50 shares of stock in

First Place Co. at a price of $41.68 a share. First Place
stock pays a quarterly dividend of $.40 a share. Today,
you sold all of your shares for $44.12 per share. What is
the total amount of your dividend income on this
investment?

A.
B.
C.
D.
E.
225. A year ago, you purchased 200 shares of Holland
Enterprises, Inc. stock at a price of $15.54 per share.
The stock pays an annual dividend of $.20 per share.
Today, you sold all of your shares for $17.70 per share.
What is your total dollar return on this investment?

A.
B.
C.
D.
E.

226. You purchased 300 shares of stock at a price of $35.86

per share. Over the last year, you have received total
dividend income of $336. What is the dividend yield?

A.
B.
C.
D.
E.

227. Bankers, Inc. stock is currently selling for $80 a share.

The stock has a dividend yield of 4.2%. How much
dividend income will you receive per year if you
purchase 150 shares of this stock?

A.
B.
C.
D.
E.

228. One year ago, you purchased a stock at a price of $40 a

share. Today, you sold the stock and realized a total
return of 30%. Your capital gain was $8 a share. What
was your dividend yield on this stock?

A.
B.
C.
D.
E.
229. You just sold 400 shares of Bosley, Inc. stock at a price
of $49.60 a share. Last year you paid $50.50 a share to
buy this stock. Over the course of the year, you
received dividends totaling $1.96 per share. What is
your capital gain on this investment?

A.
B.
C.
D.
E.

230. You purchased 200 shares of Hypex, Inc. stock for

$38.12 a share. You have received a total of $290 in
dividends and $8,130 in proceeds from selling the
shares. What is your capital gains yield on this stock?

A.
B.
C.
D.
E.

231. Today, you sold 100 shares of Natural, Inc. stock. Your
total return on these shares is 10.5%. You purchased the
shares one year ago at a price of $25.75 a share. You
have received a total of $110 in dividends over the
course of the year. What is your capital gains yield on
this investment?

A.
B.
C.
D.
E.
232. Six months ago, you purchased 1,300 shares of New
Tech stock for $12.70 a share. You have received
dividend payments equal to $.05 a share. Today, you
sold all of your shares for $14.20 a share. What is your
total dollar return on this investment?

A.
B.
C.
D.
E.

233. Seven months ago, you purchased 300 shares of

Stadford, Inc. stock at a price of $48.30 a share. The
company pays quarterly dividends of $.40 a share.
Today, you sold all of your shares for $45.20 a share.
What is your total percentage return on this
investment?

A.
B.
C.
D.
E.

234. Last year, you purchased a stock at a price of $53.60 a

share. Over the course of the year, you received $1.50
in dividends and inflation averaged 2.9%. Today, you
sold your shares for $55.90 a share. What is your
approximate real rate of return on this investment?

A.
B.
C.
D.
E.
235. Six months ago, you purchased a stock at a price of
$31.88 a share. Today, you sold those shares for $37.51
a share. During the past six months, you have received
dividends totaling $0.46 a share while inflation has
averaged 3.3%. What is your approximate real rate of
return on this investment?

A.
B.
C.
D.
E.

236. What is the amount of the excess return on a risk - free

security if the risk - free rate is 4% and the market rate
of return is 11%?

A.
B.
C.
D.
E.

237. A stock had returns of 9%, -3%, 4%, and 15% over the
past four years. What is the standard deviation of this
stock for the past four years?

A.
B.
C.
D.
E.

238. Baker's Chocolate common stock had annual returns of

13.7%, 11.3%, 4.6%, and - 8.9% over the last four
years, respectively. What is the standard deviation of
these returns?

A.
B.
C.
D.
E.
239. Milner's stock had annual returns of 11.4%, 2.6%, and
14.8% over the past three years. Which one of the
following best describes the probability that this stock
will produce a return of 25% or more next year?

A.
B.
C.
D.
E.

240. A stock has an expected rate of return of 7.9% and a

standard deviation of 6.2%. Which one of the following
best describes the probability that this stock will lose
more than 4.5% in any one given year?

A.
B.
C.
D.
E.

241. A stock has returns of 5%, 16%, -18%, and 11% for the
past four years. Based on this information, what is the
99% probability range for any one given year?

A.
B.
C.
D.
E.

242. Your friend is the owner of a stock which had returns of

6%, 17%, and 1% for the past three years. Your friend
thinks the stock may be able to achieve a return of
32.6% or more. Based on these returns, what is the
probability that this stock will earn at least the 32.6% in
any one given year?

A.
B.
C.
D.
E.
243. A stock had returns of 10%, 2%, 8%, 17%, and - 7% for
the past five years. Based on these returns, what is the
approximate probability that this stock will return at
least 15% in any one given year?

A.
B.
C.
D.
E.

244. A stock had returns of 7%, 31%, 16%, and - 22% for
the past four years. Which one of the following best
describes the probability that this stock will NOT lose
more than 59% in any one given year?

A.
B.
C.
D.
E.

245. Over the past five years, a stock produced returns of

12%, 26%, -10%, 4%, and 13%. What is the probability
that an investor in this stock will NOT lose more than
17.5% nor earn more than 35.5% in any one given
year?

A.
B.
C.
D.
E.

246. What are the geometric and arithmetic average returns

for a stock with annual returns of 5%, 10%, -8%, and
16%?

A.
B.
C.
D.
E.
247. What are the arithmetic and geometric average returns
for a stock with annual returns of 26%, 4%, -30%, 43%,
and 7%?

A.
B.
C.
D.
E.

248. A stock had returns of 5%, 16%, - 10%, and 18% over
the past four years. What is the geometric average
return for this time period?

A.
B.
C.
D.
E.

249. A stock had the following prices and dividends. What is

the geometric average return on this stock?

A.
B.
C.
D.
E.
250. An investor purchases 200 shares of a company at a
purchase price of $30.00 at the start of the year. During
the year, the company paid out $1.75 of dividends per
share. The investor then sells all the shares at a selling
price of $27.00. Determine the investor's total
percentage return.

A.
B.
C.
D.
E.

251. An investor purchases 1,000 shares of a company at a

purchase price of $18.00 at the start of the year. During
the year, the company paid out $0.75 of dividends per
share. The investor then sells all the shares at a selling
price of $19.50. Determine the investor's total
percentage return.

A.
B.
C.
D.
E.

252. An investor purchases 500 shares of a company at a

purchase price of $15.00 at the start of the year. During
the year, the company paid out $0.50 of dividends per
share. The investor then sells all the shares at a selling
price of $13.50. Determine the investor's total
percentage return.

A.
B.
C.
D.
E.
253. Ajax Corporation has experienced returns of 12%, 15%,
8% and 2% returns over the past four years. Given this
information, calculate the company's standard
deviation.

A.
B.
C.
D.
E.

254. Bianco Corporation has experienced returns of -5%,

20%, 10% and -8% returns over the past four years.
Given this information, calculate the company's
standard deviation.

A.
B.
C.
D.
E.

255. Destiny Corporation has experienced returns of 20%, -

10%, 25% and -5% returns over the past four years.
Given this information, calculate the company's
geometric average returns.

A.
B.
C.
D.
E.

256. Destiny Corporation has experienced returns of 9%,

18%, 27% and -15% returns over the past four years.
Given this information, calculate the company's
geometric average returns.

A.
B.
C.
D.
E.
257. Zara Corporation has experienced returns of -5%, 5%,
10% and 15% returns over the past four years. Given
this information, calculate the company's geometric
average returns.

A.
B.
C.
D.
E.

258. Suppose you have $30,000 invested in the stock market

and your banker comes to you and tries to get you to
move that money into the bank's GICs. He explains that
the GICs are 100% Government insured and that you
are taking unnecessary risks by being in the stock
market. How would you respond?

259. Coming out of the depression, small stocks in the U.S.

earned their highest one year historical return of 143%
in 1933. However, in the four years prior to that you
would have lost (going from 1929 to 1932, in order)
about 50%, 40%, 50%, and 5%. Suppose you started
into this five year stretch with $10,000 invested. How
much did you still have heading into 1933? How much
would you have at the end of that year? Based on these
numbers, do you think the 143% return should be
included in the return series?
260. What are the lessons learned from capital market
history? What evidence is there to suggest these lessons
are correct?

261. Define the three forms of market efficiency.

262. Explain why it is that in an efficient market,

investments have an expected NPV of zero.
263. Do you think the lessons from capital market history
will hold for each year in the future? That is, as an
example, if you buy small stocks will your investment
always outperform Treasury bills?

264. Suppose your cousin invests in the stock market and

doubles her money in a single year while the market, on
average, earned a return of only about 15%. Is your
cousin's performance a violation of market efficiency?

265. How do you think the stock market would be affected if

the laws were changed so that trading on insider
information was no longer illegal? What would be the
impact on the goal of the financial manager if such a
change were to occur?
266. Why should a financial decision maker such as a
corporate treasurer or CFO be concerned with market
efficiency?

267. Retirees with limited income and small investment

portfolios are generally perceived as facing a real
dilemma when it comes to investment risk and return.
Explain this dilemma and what its implications are for
the retirees.

268. There is a common saying among investment

professionals that "past performance does not guarantee
future returns." If this statement is correct, then why is
it important to understand the past performance of
various asset classes?
269. The Government has insider trading laws which punish
individuals who trade in the securities markets using
information that is not publicly known. Explain how
these laws might affect the degree of market efficiency
that currently exists in our capital markets.

270. How can studying the historical record of our financial

markets and inflation help you better prepare
financially for your future?
 Chapter 12 Lessons from Capital Market History Key
1. Investors shouldn't count capital gains as part of total
returns until the security is sold, since the capital gain is
really only a "paper gain" up to that point.

FALSE
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #1
Type: Concepts

2. The total return on a security is made up of two

components: the capital gains component and the price
appreciation component.

FALSE
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #2
Type: Concepts

3. In general, the longer the term of an investment the

lower the risk premium will be.

FALSE
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #3
Type: Concepts

4. On the basis of historical data from the 1957-2005

period, the return on the average Treasury bill has
fluctuated more than the return on the average long
bond.

FALSE
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #4
Type: Concepts

5. On the basis of historical data from the 1948-2002

period, the return on the average common stock has
fluctuated less than the return on the average stock of
small firms.

TRUE
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #5
Type: Concepts
6. A growth stock is a stock that results in a high return
with relatively low levels of risk.

FALSE
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #6
Type: Concepts

7. Generally speaking, financial markets are less efficient

than real asset markets.

FALSE
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #7
Type: Concepts

8. Your classmate just made $10,000 in a single day by

trading in the stock market. It is reasonable to conclude,
therefore, that the efficient market hypothesis cannot be
true.

FALSE
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #8
Type: Concepts

9. On most days, you notice that stock prices fluctuate

wildly. It is obvious to you that markets are inefficient
during this period.

FALSE
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #9
Type: Concepts

10. Capital market efficiency is attributable largely to the

lack of competition among market participants for
information.

FALSE
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #10
Type: Concepts

11. If insiders were allowed to profit on their inside

information without penalty, financial markets would
be less efficient.

TRUE
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
 Ross - Chapter 12 #11
Type: Concepts

12. The excess return required on a risky asset over that

earned on a risk-free asset is called a:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #12
Type: Definitions

13. The average squared difference between the actual

return and the average return is the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #13
Type: Definitions

14. The standard deviation for a set of stock returns can be

calculated as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #14
Type: Definitions
15. A symmetric, bell-shaped statistical distribution that is
completely defined by its mean and standard deviation
is the _______________ distribution.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #15
Type: Definitions

16. An efficient capital market is one in which:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #16
Type: Definitions

17. The notion that actual capital markets, such as the TSX,
are fairly priced is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #17
Type: Definitions

18. The hypothesis that market prices reflect all available

information is called efficiency in the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
 Ross - Chapter 12 #18
Type: Definitions

19. The hypothesis that market prices reflect all publicly-

available information is called efficiency in the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #19
Type: Definitions

20. The hypothesis that market prices reflect all historical

information is called efficiency in the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #20
Type: Definitions

21. Risk premium is defined as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #21
Type: Definitions
22. (Dt+1/Pt) + [(Pt+1 - Pt)/Pt] is the mathematical expression
for the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #22
Type: Definitions

23. The dollar rate of return on an investment can be

mathematically defined as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #23
Type: Definitions

24. The 95% probability range for returns is defined as the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #24
Type: Definitions

25. The square of the standard deviation is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #25
Type: Definitions
26. The three probability ranges used with a normal
distribution are defined as the _____ ranges.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #26
Type: Definitions

27. For a stock that does not pay a dividend, the total return
can also be defined as the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #27
Type: Definitions

28. A normal distribution is a statistical distribution that is

defined by its:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #28
Type: Definitions
29. If a company insider uses all of her knowledge about
the company stock and still has no advantage in the
marketplace over outside investors, the market has to
be:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #29
Type: Definitions

30. An efficient market is defined as one where all

investments in that market are ____ investments.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #30
Type: Definitions

31. An asset's return on investment has two components,

one of which is ____________, which reflects the cash
you receive directly while you own the investment.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #31
Type: Concepts
32. Which of the following correctly completes this
sentence: When calculating your return on investment
you should ignore _____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #32
Type: Concepts

33. Last year you purchased 100 shares of Marvel

Entertainment stock for $12 per share. According to
today's quote in The National Post, the stock is
currently selling for $18 per share. The stock pays no
dividends. Your return on this investment is comprised
of _____________________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #33
Type: Concepts

34. Based on the historical record from 1957 to 2005,

which of the following types of Canadian securities
earned the SECOND highest return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #34
Type: Concepts
35. Which of the following investments have grown faster
than the rate of inflation over the period 1957-2005?

I. Canadian common stocks

II. Treasury bills
III. Long bonds
IV. Small stocks

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #35
Type: Concepts

36. Over the past 50 years, which of the following

Canadian investments has provided the largest average
return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #36
Type: Concepts

37. Over the past 50 years, which of the following

investments has provided the smallest average return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #37
Type: Concepts
38. Over the past 50 years, which of the following
investments has been considered the most risky?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #38
Type: Concepts

39. Over the past 50 years, which of the following

investments has been the least risky?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #39
Type: Concepts

40. Which of the following statements about historical

security returns is/are true?

I. Stocks of small companies have higher average

returns than those of larger companies.
II. Risky securities have higher average returns than
riskless securities.
III. Long bonds have higher average yields than
Treasury bills.
IV. Historical information about capital markets is
useful for drawing conclusions about the relationship
between risk and return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #40
Type: Concepts
41. Why do long-term government bonds have a risk
premium?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #41
Type: Concepts

42. Which of the following is true about risk and return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #42
Type: Concepts

43. Which of the following is true?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #43
Type: Concepts

44. Which of the following is likely to be associated with

the highest level of risk?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #44
Type: Concepts
45. Which of the following is generally considered to
represent the risk-free return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #45
Type: Concepts

46. Over the 1957-2005 period, the risk premium on long

bonds has averaged ________ per year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #46
Type: Concepts

47. Over the 1970-2005 period, the risk premium on small

stocks has averaged ________ per year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #47
Type: Concepts
48. Over the 1957-2005 period, the risk premium on
Canadian common stocks has averaged ______ per
year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #48
Type: Concepts

49. You are considering two investments. You note that the
return on investment A tends to vary quite widely from
its average, definitely more so than does investment B.
Based on this, you believe that:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #49
Type: Concepts

50. _________________ is one of the most commonly used

measures of return volatility.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #50
Type: Concepts
51. Over the 1957-2005 period, the standard deviation of
returns for Canadian common stocks has averaged
_________ per year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #51
Type: Concepts

52. Over the 1970-2005 period, the standard deviation of

returns for small stocks has averaged ______________
per year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #52
Type: Concepts

53. Over the 1957-2005 period, the standard deviation of

returns for long bonds has averaged ___________ per
year.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #53
Type: Concepts
54. The normal distribution is useful in analyzing security
returns because:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #54
Type: Concepts

55. The lessons from capital market history tell us:

I. There is a reward for bearing risk.

II. The greater the potential reward from a risky asset,
the greater is the risk.
III. The TSX is an inefficient market.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #55
Type: Concepts

56. If capital markets are efficient, then

________________________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #56
Type: Concepts
57. Which of the following is NOT correct with regards to
the Efficient Markets Hypothesis?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #57
Type: Concepts

58. Which form(s) of market efficiency is/are generally

considered to hold in well-organized markets?

I. Strong form efficiency

II. Semi-strong form efficiency
III. Weak form efficiency

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #58
Type: Concepts

59. Which of the following is implied by the evidence

regarding market efficiency?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #59
Type: Concepts
60. Assume that markets are semi-strong form efficient.
Suppose, then, that during a trading day, important new
information is released for the first time concerning a
certain company. This information indicates that one of
the firm's oil fields, previously thought to be very
promising, just came up dry. How would you expect the
price of a share of stock to react to this information?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #60
Type: Concepts

61. IBM announces that earnings per share for the current
quarter are $1.25; this figure is barely half of what
investors and analysts expected. In an efficient market,
the price of IBM stock will:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #61
Type: Concepts

62. Suppose you purchase a stock expecting the price to

rise in the coming year. After one year, your stock has
actually decreased in value, due primarily to adverse
information released during the year. Which of the
following describes this result?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #62
Type: Concepts
63. You discover that you can make greater than expected
returns by buying stock in firms whenever the growth
rate in sales predicted by an investment survey exceeds
the stock's current price-earnings ratio. Which of the
following describes this event?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #63
Type: Concepts

64. You discover you can make above normal returns if you
buy oil-company stocks just before noon on any given
trading day and then sell them immediately before the
market closes that same day. Which of the following
describes this event?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #64
Type: Concepts

65. An efficient market implies

_________________________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #65
Type: Concepts
66. Which of the following statements about market
efficiency is generally considered to be true?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #66
Type: Concepts

67. Which of the following is NOT correct about market

efficiency?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #67
Type: Concepts

68. You have discovered from looking at charts of past

stock prices that if you buy just after a stock price has
declined for three consecutive days, you make money
every time! This is a violation of ________ market
efficiency.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #68
Type: Concepts
69. In efficient markets, investments have which of the
following attributes?

I. Expected return equal to zero

II. Expected NPV equal to zero
III. Expected risk premium equal to zero

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #69
Type: Concepts

70. Driving in your car, you hear that Microsoft has

announced that they have cornered the market on
Internet technology. Knowing this is great news for
Microsoft, when you arrive at a phone 30 minutes later
you call your broker and are able to buy Microsoft
stock before its price moves up on the news. This is a
violation of ___________ market efficiency.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #70
Type: Concepts
71. While eating in an exclusive restaurant in New York
City, you overhear two executives negotiating a merger.
When you check the news about the two companies
after lunch you find there is no public information
about any merger. Thus, you buy shares of stock in both
firms and make a killing when the merger is announced
publicly two days later. This is a violation of
______________ market efficiency.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #71
Type: Concepts

72. The market return on the Canadian Treasury bill is

generally used as the measure of the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #72
Type: Concepts

73. The nominal rate of return on large-company stocks

consists of a:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #73
Type: Concepts
74. Which of the following are included in the market
prices if the market is semi-strong efficient?

I. All historical information

II. All insider information
III. All public information
IV. All information of any kind

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #74
Type: Concepts

75. If the stock market is weak form efficient, then an

investor can NOT earn excess profits by:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #75
Type: Concepts

76. If a market is efficient, then the difference between the

market value of an investment and its cost is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #76
Type: Concepts
77. Last year you purchased a stock at $21.63 a share.
Today you sold your shares at $23.01 after receiving
your quarterly dividend. The total return on this stock
consists of:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #77
Type: Concepts

78. Which one of the following has the highest risk

premium based on historical information?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #78
Type: Concepts

79. Historical information has shown that there is ______

relationship between the rate of return and the risk of an
investment.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #79
Type: Concepts
80. You are an investor who studies the price movements of
stock to identify patterns that are repetitive. By doing
this, you have been able to earn higher returns than
normal. This would be a violation of:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #80
Type: Concepts

81. The higher the standard deviation of a stock the:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #81
Type: Concepts

82. Which one of the following types of investments would

be associated with the narrowest bell curve?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #82
Type: Concepts
83. Which of the following statements concerning
probability ranges of a normal distribution is (are)
correct?

I. The 99% probability range is equal to the mean plus

or minus three times the variance.
II. With a mean of 5% and a standard deviation of 10%,
the probability of earning more than 25% in any one
year is no more than 2.5%.
III. If the lowest return for a 68% probability range is -
21%, then there is a 32% chance that the loss in any one
year will be greater than 21%.
IV. The mean is equal to the average variance of an
investment over a period of time.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #83
Type: Concepts

84. The variance is the:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #84
Type: Concepts

85. Which one of the following categories has the lowest

positive, non-zero, risk premium?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #85
Type: Concepts
86. Which one of the following statements is true
concerning market performance over the period 1957-
2005?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #86
Type: Concepts

87. The historical record demonstrates that the risk of loss

decreases when the _____ increases.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #87
Type: Concepts

88. Which of the following statements is (are) true

concerning risk and return?

I. To accept higher levels of risk, investors must be paid

a higher risk premium.
II. Small-company stocks offer a higher return and less
risk than large-company stocks.
III. The risk-free rate of return is based on the long-term
government bond rate.
IV. The higher the standard deviation, the less
predictable the rate of return in any one year.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #88
Type: Concepts
89. The frequency distribution of large-company stocks
since 1957 shows that:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #89
Type: Concepts

90. The total of the deviations of actual returns from the

average return will:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #90
Type: Concepts

91. Which one of the following statements is correct

concerning the historical standard deviations of asset
classes over the period 1957-2005?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #91
Type: Concepts
92. You purchased a bond on January 1, 2002 for $839.67.
The bond has a $1,000 face value, an 8% annual
coupon, and can be sold for $842.33 on December 31,
2002. What is your total dollar return for the year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #92
Type: Problems

93. You purchased 200 shares of preferred stock on January

1, 2002 for $42.27 per share. The stock pays an annual
dividend of $7 per share. On December 31, 2002 the
market price is $46.88 per share. What is your total
dollar return for the year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #93
Type: Problems

94. You purchased a bond on January 1, 2002 for $839.67.

The bond has a $1,000 face value, an 8% annual
coupon, and can be sold for $822.33 on December 31,
2002. What is your percentage return on investment for
the year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #94
Type: Problems
95. You purchased 200 shares of preferred stock on January
1, 2002 for $42.27 per share. The stock pays an annual
dividend of $5 per share. On December 31, 2002 the
market price is $43.88 per share. What is your
percentage return on investment for the year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #95
Type: Problems

96. You purchased a bond for $900 one year ago. Today,
you receive your only interest payment for the year of
$100. The bond can currently be sold for $975. What is
your total percentage return on investment? Ignore tax
effects.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #96
Type: Problems

97. An investment earned the following returns for the

years 2003 through 2006:-20%, 50%, 30%, and 10%.
What is the variance of returns for this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #97
Type: Problems
98. Given the following historical returns, what is the
variance? Year 1 = 8%; year 2 = -12%; year 3 = 6%;
year 4 = 1%; year 5 = -19%.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #98
Type: Problems

99. Given the following historical returns, what is the

standard deviation? Year 1 = 20%; year 2 = -12%; year
3 = 16%; year 4 = 3%; year 5 = -15%.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #99
Type: Problems

100. Given the following returns, what is the variance? Year

1 = 15%; year 2 = 3%; year 3 = -29%; year 4 = -1%.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #100
Type: Problems
101. Over the last three years you earned 5%, 7%, and 9%.
What is the standard deviation of your returns?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #101
Type: Problems

102. Which of the following two stocks is more volatile

based on historical returns?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #102
Type: Problems

103. If we assume that the annual return on common stocks

are normally distributed, then approximately 95% of the
returns will fall within the range ___________% if the
average historical return is 13.2% with a standard
deviation of 20.3%.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #103
Type: Problems
104. What is the total dollar return for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #104
Type: Problems

105. What is the capital gains yield for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #105
Type: Problems

106. What is the dividend yield for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #106
Type: Problems

107. What is the total percentage return for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #107
Type: Problems
108. What is the total dollar return for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #108
Type: Problems

109. What is the capital gains yield for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #109
Type: Problems

110. What is the dividend yield for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #110
Type: Problems

111. What is the total percentage return for the investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #111
Type: Problems
 Use the following historical average returns and
standard deviations to answer the question below.

Ross - Chapter 12

112. What is the historical risk premium on Canadian

common stocks?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #112
Type: Problems

113. What is the historical risk premium of Canadian

common stocks over long bonds?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #113
Type: Problems

114. Based on the historical data above, what is your reward

for bearing risk of owning small-company stocks rather
than Canadian common stocks?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
 Ross - Chapter 12 #114
Type: Problems

115. If the returns on small-company stocks are normally

distributed, which of the following returns would lie in
a 99% confidence interval around the mean, but not in a
95% confidence interval?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #115
Type: Problems

116. Assume the return on T-bills is normally distributed.

Assuming a 68% probability, what is the highest return
you would expect to earn on T-bills?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #116
Type: Problems

117. Marti purchased a stock one year ago at a price of

$23.89. Over the past year she has received a total of
$1.63 in dividends. Today she sold the stock for $22.84.
What percentage total return did Marti earn on this
investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #117
Type: Problems
118. Sam purchased a stock for $46.91 one year ago. Today
he sold the stock for $48.03. The stock paid a total of
$1.40 in dividends over the year. What capital gains
yield did Sam realize on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #118
Type: Problems

119. Frederico paid $86.70 for a stock one year ago. Today
he sold the stock for $88.20. Over the year, Frederico
received four quarterly dividends of $0.60 each. What
was the dividend yield on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #119
Type: Problems

120. A stock produced total returns of 10.4%, -11.9%, -

21.7%, and 31.2% over the past four years,
respectively. What is the average rate of return for this
period of time?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #120
Type: Problems
121. A stock produced total returns of 9.78%, 13.61%,
1.19%, and -4.90% over the past four years,
respectively. What is the variance on this set of
returns?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #121
Type: Problems

122. You purchased a five-year 6% annual coupon bond one

year ago for $990. You sold the bond today when the
market rate of return is 4.5%. If the inflation rate for the
past year was 2.0%, what nominal rate of return did you
earn on this investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #122
Type: Problems

123. Angelo purchased a 7% annual coupon bond one year

ago for $987. At the time of purchase, the bond had six
years to maturity. Over the past year inflation has been
3.2%. The market required return on this bond today is
8%. If Angelo sells the bond today at the market price,
what real rate of return will he realize on this
investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #123
Type: Problems
124. A stock produced total returns of 11.5%, 8.3%, and -
2.4% over the past three years, respectively. Based on
this information what range of returns would you
expect to see 95% of the time?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #124
Type: Problems

125. ABC stock pays a $1.80 annual dividend. The market

price of the stock was $21.74, $19.83, $22.60, and
$23.10 at the end of the past four years, respectively.
Based on this information, what is the mean rate of
return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #125
Type: Problems

126. A stock has an average rate of return of 11.5% and a

standard deviation of 12.8%. What is the probability
that the stock will lose more than 26.9% in any one
year?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #126
Type: Problems
127. Assume that for some period of time corporate bonds
had an average rate of return of 5.4% while Treasury
bills returned 2.8% and inflation averaged 2.7%. Given
these assumptions, what is the risk premium on
corporate bonds?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #127
Type: Problems

128. Fred made the following rates of return on his portfolio

over the past five years. The T-Bill rate and the inflation
rate for each year are also shown. Based on this
information, in which year did Fred have the highest
real rate of return?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #128
Type: Problems
129. Over the past four years a stock produced annual
returns of 4%, -18%, - 21%, and 48%, respectively.
Based on this information, what is the standard
deviation for this stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #129
Type: Problems

130. Over the past five years a stock produced annual returns
of 11%, 16%, 5%, 2%, and 9%, respectively. Based on
this information, what is the standard deviation for this
stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #130
Type: Problems

131. One year ago, Yokino purchased 100 shares of stock for
$3,896. Since that time, he has received a total of $180
in dividends. If he sells the stock at today's market price
he will realize a total return on his investment of
10.37%. Assuming he sells the stock today, what is the
dollar amount of his capital gain per share of stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #131
Type: Problems
132. One year ago, Kyra purchased a ten-year 5% corporate
bond for $986. The bond is currently selling for $1,002.
If Kyra sells the bond today, what is the dollar amount
of the total return she would realize on this investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #132
Type: Problems

133. You purchased a stock one year ago for $91.20. Today
you sold the stock and realized a total return of -63.7%
on your investment. During the year you received a
total of $2.28 in dividends. At what price did you sell
the stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #133
Type: Problems

134. You purchased a stock for $47.00 a share one year ago.
Today you sold the stock for $50.21 a share and
realized an 8.51% total rate of return. What was the
dividend yield on this stock for the past year?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #134
Type: Problems
135. An investor purchased a stock for $1.61 per share, held
it for one year, and sold it for $3.03 a share. The stock
did not pay a dividend. Inflation for that year was 3.2%
and Treasury bills returned 3.7%. What is the real rate
of return on this investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #135
Type: Problems

136. The average compound return earned per year over a

multi-year period is called the _____ average return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #136
Type: Definitions

137. The return earned in an average year over a multi-year

period is called the _____ average return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #137
Type: Definitions
138. The total percentage return on an equity investment is
computed using the formula ______, where P1 is the
purchase cost, P2 represents the sale proceeds, and d is
the dividend income.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #138
Type: Concepts

139. The dividend yield is equal to _____, where P1 is the

purchase cost, P2 represents the sale proceeds, and d is
the dividend income.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #139
Type: Concepts

140. The Zolo Co. just declared that they are increasing their
annual dividend from $1.00 per share to $1.25 per
share. If the stock price remains constant, then:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #140
Type: Concepts
141. The dollar amount of the capital gain on an investment
is computed as _____, where P1 is the purchase cost, P2
represents the sale proceeds, and d is the dividend
income.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #141
Type: Concepts

142. The capital gains yield plus the dividend yield on a

security is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #142
Type: Concepts

143. The real rate of return on a stock is approximately equal

to the nominal rate of return:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #143
Type: Concepts
144. As long as the inflation rate is positive, the real rate of
return on a security investment will be ____ the
nominal rate of return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #144
Type: Concepts

145. A portfolio of large company stocks would contain

which one of the following types of securities?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #145
Type: Concepts

146. $1 invested in Canadian Treasury bills in 1957 would

have increased in value to approximately ____ by
2005.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #146
Type: Concepts
147. Which one of the following is a correct ranking of
securities based on their volatility over the period of
1957 to 2005? Rank from highest to lowest.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #147
Type: Concepts

148. $1 invested in large company stocks in 1957 would

have increased in value to approximately _____ by
2005.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #148
Type: Concepts

149. Which one of the following is a correct statement

concerning risk premium?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #149
Type: Concepts
150. The risk premium is computed by ______ the average
return for the investment.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #150
Type: Concepts

151. The excess return you earn by moving from a relatively

risk-free investment to a risky investment is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #151
Type: Concepts

152. To convince investors to accept greater volatility in the

annual rate of return on an investment, you must:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #152
Type: Concepts

153. Which one of the following takes the shape of a bell

curve?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
 Ross - Chapter 12 #153
Type: Concepts

154. Which of the following statements are correct

concerning the variance of the annual returns on an
investment?

I. The larger the variance, the more the actual returns

tend to differ from the average return.
II. The larger the variance, the larger the standard
deviation.
III. The larger the variance, the greater the risk of the
investment.
IV. The larger the variance, the higher the expected
return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #154
Type: Concepts

155. The variance of returns is computed by dividing the

sum of the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #155
Type: Concepts
156. Which of the following statements concerning the
standard deviation are correct?

I. The greater the standard deviation, the lower the risk.

II. The standard deviation is a measure of volatility.
III. The higher the standard deviation, the less certain
the rate of return in any one given year.
IV. The higher the standard deviation, the higher the
expected return.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #156
Type: Concepts

157. Estimates using the arithmetic average will probably

tend to _____ values over the long-term while estimates
using the geometric average will probably tend to
_____ values over the short-term.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #157
Type: Concepts

158. In an efficient market, the price of a security will:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #158
Type: Concepts
159. If the financial markets are efficient, then investors
should expect their investments in those markets to:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #159
Type: Concepts

160. Which one of the following statements is correct

concerning market efficiency?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #160
Type: Concepts

161. Financial markets fluctuate daily because they:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #161
Type: Concepts

162. Insider trading does not offer any advantages if the

financial markets are:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #162
 Type: Concepts

163. According to theory, studying historical prices in order

to identify mispriced stocks will not work in markets
that are _____ efficient.

I. weak-form
II. semi-strong-form
III. strong-form

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #163
Type: Concepts

164. Which of the following tend to reinforce the argument

that the financial markets are efficient?

I. Information spreads rapidly in today's world.

II. There is tremendous competition in the financial
markets.
III. Market prices continually fluctuate.
IV. Market prices react suddenly to unexpected news
announcements.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #164
Type: Concepts
165. If you excel in analyzing the future outlook of firms,
you would prefer that the financial markets be ____
form efficient so that you can have an advantage in the
marketplace.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #165
Type: Concepts

166. Your best friend works in the finance office of the Delta
Corporation. You are aware that this friend trades Delta
stock based on information he overhears in the office.
You know that this information is not known to the
general public. Your friend continually brags to you
about the profits he earns trading Delta stock. Based on
this information, you would tend to argue that the
financial markets are at best _____ form efficient.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #166
Type: Concepts

167. The U.S. Securities and Exchange Commission

periodically charges individuals for insider trading and
claims those individuals have made unfair profits.
Based on this fact, you would tend to argue that the
financial markets are at best _____ form efficient.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #167
Type: Concepts
168. Individuals that continually monitor the financial
markets seeking mispriced securities:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #168
Type: Concepts

169. One year ago, you purchased a stock at a price of

$32.50. The stock pays quarterly dividends of $.40 per
share. Today, the stock is worth $34.60 per share. What
is the total amount of your dividend income to date
from this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #169
Type: Problems

170. Six months ago, you purchased 100 shares of stock in

ABC Co. at a price of $43.89 a share. ABC stock pays a
quarterly dividend of $.10 a share. Today, you sold all
of your shares for $45.13 per share. What is the total
amount of your capital gains on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #170
Type: Problems
171. A year ago, you purchased 300 shares of IXC
Technologies, Inc. stock at a price of $9.03 per share.
The stock pays an annual dividend of $.10 per share.
Today, you sold all of your shares for $28.14 per share.
What is your total dollar return on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #171
Type: Problems

172. Winslow, Inc. stock is currently selling for $40 a share.

The stock has a dividend yield of 3.8%. How much
dividend income will you receive per year if you
purchase 500 shares of this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #172
Type: Problems

173. One year ago, you purchased a stock at a price of $32 a

share. Today, you sold the stock and realized a total
return of 25%. Your capital gain was $6 a share. What
was your dividend yield on this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #173
Type: Problems
174. You just sold 200 shares of Langley, Inc. stock at a
price of $38.75 a share. Last year you paid $41.50 a
share to buy this stock. Over the course of the year, you
received dividends totaling $1.64 per share. What is
your capital gain on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #174
Type: Problems

175. You purchased 300 shares of Deltona, Inc. stock for

$44.90 a share. You have received a total of $630 in
dividends and $14,040 in proceeds from selling the
shares. What is your capital gains yield on this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #175
Type: Problems

176. Today, you sold 200 shares of SLG, Inc. stock. Your
total return on these shares is 12.5%. You purchased the
shares one year ago at a price of $28.50 a share. You
have received a total of $280 in dividends over the
course of the year. What is your capital gains yield on
this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #176
Type: Problems
177. Eight months ago, you purchased 400 shares of
Winston, Inc. stock at a price of $54.90 a share. The
company pays quarterly dividends of $.50 a share.
Today, you sold all of your shares for $49.30 a share.
What is your total percentage return on this
investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #177
Type: Problems

178. Seven months ago, you purchased a stock at a price of

$36.04 a share. Today, you sold those shares for $43.15
a share. During the past seven months, you have
received dividends totaling $0.24 a share while inflation
has averaged 3.6%. What is your approximate real rate
of return on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #178
Type: Problems

179. A stock has an expected rate of return of 8.3% and a

standard deviation of 6.4%. Which one of the following
best describes the probability that this stock will lose
11% or more in any one given year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #179
Type: Problems
180. What are the arithmetic and geometric average returns
for a stock with annual returns of 21%, 8%, -32%, 41%,
and 5%?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #180
Type: Problems

181. A stock had returns of 6%, 13%, -11%, and 17% over
the past four years. What is the geometric average
return for this time period?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #181
Type: Problems

182. A stock had the following prices and dividends. What is

the geometric average return on this stock?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #182
Type: Problems
183. The risk premium of an asset is defined as the return on
the asset in excess of the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #183
Type: Definitions

184. The variance is defined as the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #184
Type: Definitions

185. The geometric average return is defined as the _____

over a multi-year period.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #185
Type: Definitions

186. The arithmetic average return is defined as the _____

over a multiyear period.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #186
 Type: Definitions

187. The semi-strong form of market efficiency is best

described as a market where _____ reflected in the
current security prices.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #187
Type: Definitions

188. The total return on a security is computed as the

summation of the dividend income and the capital gain
expressed as a percentage of the security's:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #188
Type: Definitions

189. The dividend yield is computed as the annual dividend

in year t + 1 divided by the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #189
Type: Definitions
190. Which of the following will increase the dividend yield
on a stock at time t?

I. an increase in the dividend for time t + 1

II. a decrease in the market value of the security at time
t
III. a decrease in the market value of the security at
time t + 1
|IV. an increase in the market value of the security at
time t + 1

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #190
Type: Concepts

191. The capital gains yield on a security:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #191
Type: Concepts

192. The nominal rate of return minus the inflation rate is

called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #192
Type: Concepts
193. Over the period of 1970-2005, small-company stocks:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #193
Type: Concepts

194. Treasury bills:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #194
Type: Concepts

195. Based on the period 1957-2005, the standard deviation:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #195
Type: Concepts

196. Which one of the following categories of securities has

the highest average risk premium?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #196
Type: Concepts
197. Over the long-term, the greater the volatility in the
returns on a risky security the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #197
Type: Concepts

198. Which of the following statements concerning the

standard deviation are correct?

I. The standard deviation measures the volatility of a

security's returns.
II. The standard deviation can be negative, positive, or
equal to zero.
III. The 95% probability range is equal to the mean plus
or minus three standard deviations.
IV. The lower the standard deviation, the lower the level
of risk.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #198
Type: Concepts

199. If the securities market is strong-form efficient, then:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #199
Type: Concepts
200. In an efficient market:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #200
Type: Concepts

201. If capital markets are semi-strong form efficient, then:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #201
Type: Concepts

202. One year ago, Tina purchased 200 shares of Addado

Companies at a cost of $38.90 a share. The stock pays
quarterly dividends of $.65 per share. Today, Tina sold
her shares for $41.20 per share. How much dividend
income did Tina receive as a result of her ownership of
these shares?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #202
Type: Problems
203. Eight months ago, Turner purchased 100 shares of
Delta Frames stock at a price of $47.08 a share. Delta
pays a quarterly dividend of $1.10 a share. Today,
Turner sold all of his shares for $48.63 per share. What
is Turner's total capital gain on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #203
Type: Problems

204. One year ago, you purchased 600 shares of Westover

Paints stock at a price of $3.68 per share. The stock
pays an annual dividend of $.02 per share. Today, you
sold all of your shares for $11.21 per share. What is
your total dollar return on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #204
Type: Problems

205. Last year, Sylvia purchased 300 shares of Webster

Companies stock at a price of $40.27 per share. Today,
those shares are valued at $38.20 a share. Over the last
year, Sylvia received total dividend income of $450.
What is the current dividend yield on Webster stock if
the firm pays a constant dividend?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #205
Type: Problems
206. Analog, Inc. stock is currently selling for $16.92 a
share. The stock has a dividend yield of 1.3%. How
much dividend income will you receive per year if you
purchase 600 shares of this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #206
Type: Problems

207. One year ago, Stephen purchased 100 shares of K&L

stock at a price of $18 a share. Today, he sold the stock
and realized a total return of 20%. His capital gain was
$3.60 a share. What is the current dividend yield on this
stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #207
Type: Problems

208. You just sold 450 shares of Zeus, Inc. stock at a price of
$51.90 a share. Last year, you paid $36.20 a share when
you bought them. Over the course of the year, you
received dividends totaling $2.10 per share. What is
your capital gain on this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #208
Type: Problems
209. You purchased 500 shares of Brown Stone stock for
$41.80 a share. You have received a total of $820 in
dividends and $7,280 in proceeds from selling the
shares. What is your capital gains yield on this stock?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #209
Type: Problems

210. Today, you sold 700 shares of RZX stock. Your total
return on these shares is 16.2%. You purchased the
shares one year ago at a price of $33.40 a share. You
received a total of $770 in dividends over the course of
the year. What is your capital gains yield on this
investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #210
Type: Problems

211. Six months ago, you purchased 250 shares of QE stock

for $18.67 a share. You received dividend payments
equal to $.45 a share. Today, you sold all of your shares
for $15.40 a share. What is your total dollar return on
this investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #211
Type: Problems
212. Nine months ago, you purchased 350 shares of
Southland, Inc. stock at a price of $62.47 a share. The
company pays quarterly dividends of $.85 a share.
Today, you sold all of your shares for $67.82 a share.
What is your total percentage return on this
investment?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #212
Type: Problems

213. Last year, Marsha purchased a stock at a price of

$21.36 a share. Over the course of the year, she
received $.60 in dividends per share while inflation
averaged 3.2%. Today, Marsha sold her shares for
$22.80 a share. What is Marsha's real rate of return on
this investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #213
Type: Problems

214. One year ago, Valerie purchased a stock at a price of

$26 a share. Today, she sold those shares for $26.50 a
share. During the past year, she received dividends
totaling $0.50 a share while inflation averaged 2.8%.
What is Valerie's real rate of return on this investment?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #214
Type: Problems
215. A stock returned 14%, -22%, 3%, and 34% over the
past four years, respectively. What is the standard
deviation of this stock based on the past four years?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #215
Type: Problems

216. Leah Merryweather stock has an expected rate of return

of 12.5% and a standard deviation of 26.3%. Which one
of the following best describes the probability that this
stock will lose 40% or more in any one given year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #216
Type: Problems

217. Theta stock returned 2%, -5%, 12%, and 28% for the
past four years, respectively. Based on this information,
what is the 95% probability range of returns for any one
given year?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #217
Type: Problems
218. Over the past five years, Redstone Enterprises produced
returns of 31%, 38%, -41%, 8%, and 15%. The mean of
these returns is _____% and the standard deviation is
_____%.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #218
Type: Problems

219. Treadwell Motors stock returned 11%, 14%, 3%, and

9% over the past 4 years, respectively. The arithmetic
average return for this period is _____%.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #219
Type: Problems

220. The common stock of Petersen and White Importers

yielded returns of 42%, -5%, -18%, 9%, and 12% over
the past 5 years, respectively. The arithmetic average
return for this period of time is _____% while the
geometric average return is _____%.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #220
Type: Problems
221. A stock had returns of 8%, 11%, -2%, 5%, and 13%
over the past 5 years, respectively. What is the
geometric average rate of return for this time period?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #221
Type: Problems

222. LK Pattern Shops had the following prices and

dividends for the past 4 years. What is the geometric
average rate of return on this stock based on this period
of time?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #222
Type: Problems
223. One year ago, you purchased a stock at a price of
$28.75. The stock pays quarterly dividends of $.35 per
share. Today, the stock is worth $31.25 per share. What
is the total amount of your capital gains to date from
this investment?

A.
B.
C.
D.
E.

Capital gains = $31.25 - $28.75 = $2.50

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #223
Type: Problems

224. Six months ago, you purchased 50 shares of stock in

First Place Co. at a price of $41.68 a share. First Place
stock pays a quarterly dividend of $.40 a share. Today,
you sold all of your shares for $44.12 per share. What is
the total amount of your dividend income on this
investment?

A.
B.
C.
D.
E.

Dividend income = ($.40 × 2) × 50 = $40.00

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #224
Type: Problems
225. A year ago, you purchased 200 shares of Holland
Enterprises, Inc. stock at a price of $15.54 per share.
The stock pays an annual dividend of $.20 per share.
Today, you sold all of your shares for $17.70 per share.
What is your total dollar return on this investment?

A.
B.
C.
D.
E.

Total dollar return = ($17.70 - $15.54 + $.20) × 200 =

$472

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #225
Type: Problems

226. You purchased 300 shares of stock at a price of $35.86

per share. Over the last year, you have received total
dividend income of $336. What is the dividend yield?

A.
B.
C.
D.
E.

Dividend per share = $336/300 = $1.12; Dividend yield

= $1.12/$35.86 = 3.1%

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #226
Type: Problems
227. Bankers, Inc. stock is currently selling for $80 a share.
The stock has a dividend yield of 4.2%. How much
dividend income will you receive per year if you
purchase 150 shares of this stock?

A.
B.
C.
D.
E.

Dividend income = $80 × .042 × 150 = $504

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #227
Type: Problems

228. One year ago, you purchased a stock at a price of $40 a

share. Today, you sold the stock and realized a total
return of 30%. Your capital gain was $8 a share. What
was your dividend yield on this stock?

A.
B.
C.
D.
E.

Capital gains yield = $8/$40 = 20.00%; Dividend yield

= 30% - 20% = 10%

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #228
Type: Problems
229. You just sold 400 shares of Bosley, Inc. stock at a price
of $49.60 a share. Last year you paid $50.50 a share to
buy this stock. Over the course of the year, you
received dividends totaling $1.96 per share. What is
your capital gain on this investment?

A.
B.
C.
D.
E.

Capital gain = ($49.60 - $50.50) × 400 = - $360 (capital

loss)

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #229
Type: Problems

230. You purchased 200 shares of Hypex, Inc. stock for

$38.12 a share. You have received a total of $290 in
dividends and $8,130 in proceeds from selling the
shares. What is your capital gains yield on this stock?

A.
B.
C.
D.
E.

Cost = 200 × $38.12 = $7,624; Capital gains yield =

($8,130 - $7,624)/$7,624 = 6.6%

Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #230
Type: Problems
231. Today, you sold 100 shares of Natural, Inc. stock. Your
total return on these shares is 10.5%. You purchased the
shares one year ago at a price of $25.75 a share. You
have received a total of $110 in dividends over the
course of the year. What is your capital gains yield on
this investment?

A.
B.
C.
D.
E.

Dividend yield = $110/(100 × $25.75) = 4.27%; Capital

gains yield = 10.5 % - 4.27% = 6.23%

Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #231
Type: Problems

232. Six months ago, you purchased 1,300 shares of New

Tech stock for $12.70 a share. You have received
dividend payments equal to $.05 a share. Today, you
sold all of your shares for $14.20 a share. What is your
total dollar return on this investment?

A.
B.
C.
D.
E.

Total dollar return = ($14.20 - $12.70 + $.05) × 1,300 =

$2,015

Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #232
Type: Problems
233. Seven months ago, you purchased 300 shares of
Stadford, Inc. stock at a price of $48.30 a share. The
company pays quarterly dividends of $.40 a share.
Today, you sold all of your shares for $45.20 a share.
What is your total percentage return on this
investment?

A.
B.
C.
D.
E.

Total percentage return = ($45.20 - $48.30 + $.40 +

$.40)/$48.30 = - 4.8% (loss)

Difficulty: Basic
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #233
Type: Problems

234. Last year, you purchased a stock at a price of $53.60 a

share. Over the course of the year, you received $1.50
in dividends and inflation averaged 2.9%. Today, you
sold your shares for $55.90 a share. What is your
approximate real rate of return on this investment?

A.
B.
C.
D.
E.

Nominal return = ($55.90 - $53.60 + $1.50)/$53.60 =

7.09%; Real return = 7.09% - 2.9% = 4.19% = 4.2%

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #234
Type: Problems
235. Six months ago, you purchased a stock at a price of
$31.88 a share. Today, you sold those shares for $37.51
a share. During the past six months, you have received
dividends totaling $0.46 a share while inflation has
averaged 3.3%. What is your approximate real rate of
return on this investment?

A.
B.
C.
D.
E.

Nominal return = ($37.51 - $31.88 + $.46)/$31.88 =

19.10%; Real return = 19.10% - 3.3% = 15.8%

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #235
Type: Problems

236. What is the amount of the excess return on a risk - free

security if the risk - free rate is 4% and the market rate
of return is 11%?

A.
B.
C.
D.
E.

There is no excess return, or risk premium, for a risk-

free security.

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #236
Type: Problems
237. A stock had returns of 9%, -3%, 4%, and 15% over the
past four years. What is the standard deviation of this
stock for the past four years?

A.
B.
C.
D.
E.

Average return = (.09 - .03 + .04 + .15)/4 = .0625; Total

squared deviation = (.09 - .0625)2 + (-.03 - .0625)2 +
(.04 - .0625)2 + (.15 - .0625)2 = .00075625 + .00855625
+ .00050625 + .00765625 = .017475; Standard
deviation = (.017475)/(4 - 1) = .005825
= .07632 = 7.6%

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #237
Type: Problems

238. Baker's Chocolate common stock had annual returns of

13.7%, 11.3%, 4.6%, and - 8.9% over the last four
years, respectively. What is the standard deviation of
these returns?

A.
B.
C.
D.
E.

Average return = (.137 + .113 + .046 - .089)/4 = .05175;

Total squared deviation = (.137 - .05175)2 + (.113
- .05175)2 + (.046 - .05175)2 + (-.089 - .05175)2
= .007267563 + .003751563 + .000033063
+ .019810563 = .030863; Standard deviation =
(.030863)/(4 - 1) = .010288 = .10143 = 10.1%

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #238
Type: Problems
239. Milner's stock had annual returns of 11.4%, 2.6%, and
14.8% over the past three years. Which one of the
following best describes the probability that this stock
will produce a return of 25% or more next year?

A.
B.
C.
D.
E.

Average return = (.114 + .026 + .148)/3 = .096; Total

squared deviation = (.114 - .096)2 + (.026 - .096)2 +
(.148 - .096)2 = .000324 + .0049 + .002704 = .007928;
Standard deviation = (.007928)/(3 - 1) =
.003964 = .0630 = 6.3%; Upper end of 95% probability
range = 9.6% + (2)6.3% = 22.2%; Upper end of 99%
probability range = 9.6% + (3)6.3% = 28.5%; Thus, a
return of 25% or more has less than a 2.5% chance of
occurring in any one year.

Difficulty: Challenge
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #239
Type: Problems

240. A stock has an expected rate of return of 7.9% and a

standard deviation of 6.2%. Which one of the following
best describes the probability that this stock will lose
more than 4.5% in any one given year?

A.
B.
C.
D.
E.

Lower bound of 95% probability range = .079 - (2

× .062) = - .045 = -4.5%; Probability of losing more
than 4.5 is less than 2.5%.

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #240
Type: Problems
241. A stock has returns of 5%, 16%, -18%, and 11% for the
past four years. Based on this information, what is the
99% probability range for any one given year?

A.
B.
C.
D.
E.

Average return = (.05 + .16 - .18 + .11)/4 = .035; Total

squared deviation = (.05 - .035)2 + (.16 - .035)2 + (-.18 -
.035)2 + (.11 - .035)2 = .000225 + .015625 + .046225
+ .005625 = .0677; Standard deviation =
(.0677)/(4 - 1) = .0225667 = .150222 = 15.022%;
99% probability range = 3.5% (3 × 15.0222)% = -
41.6 to 48.6%

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #241
Type: Problems

242. Your friend is the owner of a stock which had returns of

6%, 17%, and 1% for the past three years. Your friend
thinks the stock may be able to achieve a return of
32.6% or more. Based on these returns, what is the
probability that this stock will earn at least the 32.6% in
any one given year?

A.
B.
C.
D.
E.

Average return = (.06 + .17 + .01)/3 = 8%; Total

squared deviation = (.06 - .08)2 + (.17 - .08)2 + (.01
- .08)2 = .0004 + .0081 + .0049 = .0134; Standard
deviation = (.0134)/(3 - 1) = .08185 = 8.185%;
Upper end of the 99% probability range = 8% + (3 ×
8.185%) = 32.6%; Probability of earning at least 32.6%
in any one year is .5%.

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #242
Type: Problems
243. A stock had returns of 10%, 2%, 8%, 17%, and - 7% for
the past five years. Based on these returns, what is the
approximate probability that this stock will return at
least 15% in any one given year?

A.
B.
C.
D.
E.

Average return = (.10 + .02 + .08 + .17 - .07)/5 = 6%;

Total squared deviation = (.10 - .06)2 + (.02 - .06)2 +
(.08 - .06)2 + (.17 - .06)2 + (-.07 - .06)2 = .0016 + .0016
+ .0004 + .0121 + .0169 = .0326; Standard deviation =
(.0326)/(5 - 1) = .00815 = .0903 = 9.0%;
Upper end of the 68% probability range = .06 + .0903 =
15.03%; Probability of earning at least 15% in any one
year is approximately 16%.

Difficulty: Challenge
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #243
Type: Problems

244. A stock had returns of 7%, 31%, 16%, and - 22% for
the past four years. Which one of the following best
describes the probability that this stock will NOT lose
more than 59% in any one given year?

A.
B.
C.
D.
E.

Average return = (.07 + .31 + .16 - .22)/4 = 8%; Total

squared deviation = (.07 - .08)2 + (.31 - .08)2 + (.16
- .08)2 + (-.22 - .08)2 = .0001 + .0529 + .0064 + .09
= .1494; Standard deviation = .1494/(4 - 1) =
.0498 = 22.3159%; Lower bound of the 99%
probability range = 8% - (3 × 22.3159%) = -58.95;
Probability of NOT losing more than 59% in any given
year is 99.5%.

Difficulty: Challenge
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #244
Type: Problems
245. Over the past five years, a stock produced returns of
12%, 26%, -10%, 4%, and 13%. What is the probability
that an investor in this stock will NOT lose more than
17.5% nor earn more than 35.5% in any one given
year?

A.
B.
C.
D.
E.

Average return = (.12 + .26 - .10 + .04 + .13)/5 = 9%;

Total squared deviation = (.12 - .09)2 + (.26 - .09)2 +
(-.10 - .09)2 + (.04 - .09)2 + (.13 - .09)2 = .0009 + .0289
+ .0361 + .0025 + .0016 = .07; Standard deviation =
.07/(5 - 1) = .0175 = 13.229%; 95%
probability range = 9% (2 × 13.229%) = -17.5%
to 35.5%; The answer is 95%.

Difficulty: Challenge
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #245
Type: Problems

246. What are the geometric and arithmetic average returns

for a stock with annual returns of 5%, 10%, -8%, and
16%?

A.
B.
C.
D.
E.

Geometric return = (1.05 × 1.10 × .92 × 1.16).25 - 1 =

5.37%; Arithmetic average = (.05 + .10 - .08 + .16)/4 =
5.75%

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #246
Type: Problems
247. What are the arithmetic and geometric average returns
for a stock with annual returns of 26%, 4%, -30%, 43%,
and 7%?

A.
B.
C.
D.
E.

Arithmetic average = (.26 + .04 - .30 + .43 + .07)/5 =

10.0%; Geometric return = (1.26 × 1.04 × .70 × 1.43 ×
1.07).20 - 1 = 7.0%

Difficulty: Basic
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #247
Type: Problems

248. A stock had returns of 5%, 16%, - 10%, and 18% over
the past four years. What is the geometric average
return for this time period?

A.
B.
C.
D.
E.

Geometric average = (1.05 × 1.16 × .90 × 1.18).25 - 1 =

6.6%

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #248
Type: Problems
249. A stock had the following prices and dividends. What is
the geometric average return on this stock?

A.
B.
C.
D.
E.

Return for year 2 = ($22.90 - $22.57 + $.30)/$22.57 =

2.7913%; Return for year 3 = ($22.26 - $22.90 +
$.31)/$22.90 = -1.4410%; Return for year 4 = ($24.08 -
$22.26 + $.33)/$22.26 = 9.6586%; Geometric return =
(1.027913 × .985590 × 1.096586).3333 - 1 = 3.6%

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #249
Type: Problems
250. An investor purchases 200 shares of a company at a
purchase price of $30.00 at the start of the year. During
the year, the company paid out $1.75 of dividends per
share. The investor then sells all the shares at a selling
price of $27.00. Determine the investor's total
percentage return.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #250
Type: Multiple Choice
251. An investor purchases 1,000 shares of a company at a
purchase price of $18.00 at the start of the year. During
the year, the company paid out $0.75 of dividends per
share. The investor then sells all the shares at a selling
price of $19.50. Determine the investor's total
percentage return.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #251
Type: Multiple Choice
252. An investor purchases 500 shares of a company at a
purchase price of $15.00 at the start of the year. During
the year, the company paid out $0.50 of dividends per
share. The investor then sells all the shares at a selling
price of $13.50. Determine the investor's total
percentage return.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #252
Type: Multiple Choice
253. Ajax Corporation has experienced returns of 12%, 15%,
8% and 2% returns over the past four years. Given this
information, calculate the company's standard
deviation.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #253
Type: Multiple Choice
254. Bianco Corporation has experienced returns of -5%,
20%, 10% and -8% returns over the past four years.
Given this information, calculate the company's
standard deviation.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #254
Type: Multiple Choice
255. Destiny Corporation has experienced returns of 20%, -
10%, 25% and -5% returns over the past four years.
Given this information, calculate the company's
geometric average returns.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #255
Type: Multiple Choice
256. Destiny Corporation has experienced returns of 9%,
18%, 27% and -15% returns over the past four years.
Given this information, calculate the company's
geometric average returns.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #256
Type: Multiple Choice
257. Zara Corporation has experienced returns of -5%, 5%,
10% and 15% returns over the past four years. Given
this information, calculate the company's geometric
average returns.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #257
Type: Multiple Choice
258. Suppose you have $30,000 invested in the stock market
and your banker comes to you and tries to get you to
move that money into the bank's GICs. He explains that
the GICs are 100% Government insured and that you
are taking unnecessary risks by being in the stock
market. How would you respond?

The usual response is that bank GICs typically will

offer a very low rate of return because of their low level
of risk. Even if students do not know the relationship
between yields on GICs and historical returns on
stocks, they should recognize that because of the risk
differences the GICs must have a lower expected return.
So, if the investor in the question is willing to trade off
some safety in order to have the chance to earn larger
returns, the stock market is the correct investment.

Difficulty: Challenge
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #258
Type: Essay
259. Coming out of the depression, small stocks in the U.S.
earned their highest one year historical return of 143%
in 1933. However, in the four years prior to that you
would have lost (going from 1929 to 1932, in order)
about 50%, 40%, 50%, and 5%. Suppose you started
into this five year stretch with $10,000 invested. How
much did you still have heading into 1933? How much
would you have at the end of that year? Based on these
numbers, do you think the 143% return should be
included in the return series?

This question gives students the chance to convert

returns into values and to see the impact of several
years' losses on invested wealth. If you began with
$10,000, your investment declines (year-by-year) to
$5,000, $3,000, $1,500, and $1,425. So, you begin 1933
with only $1,425 left. At the end of that year, you have
$3,463, a far cry from your starting point of $10,000.
The astute student will point out that by the time the
143% return rolls around, the value of the investment
has declined so much that the large single return in
1933 still leaves you far behind your initial investment.
Small stocks are volatile and as such, you expect years
of large losses and large gains, therefore no single
year's return should be left out simply because it
appears to be an outlier.

Difficulty: Challenge
Learning Objective: 12-01 How to calculate the return on an investment.
Ross - Chapter 12 #259
Type: Essay

260. What are the lessons learned from capital market

history? What evidence is there to suggest these lessons
are correct?

First, there is a reward for bearing risk, and second, the

greater the reward, the greater the risk. As evidence, the
students should provide a brief discussion of the
historical rates of return and standard deviation of
returns of the various asset classes discussed in the text.

Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #260
Type: Essay
261. Define the three forms of market efficiency.

The student should present a straightforward discussion

of weak (all past prices are in the current price), semi-
strong (all public information is in the current price),
and strong form (all information is in the current price)
market efficiency.

Difficulty: Basic
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #261
Type: Essay

262. Explain why it is that in an efficient market,

investments have an expected NPV of zero.

In an efficient market, prices are "fair" so that the cost

of an investment is neither too high nor too low. Thus,
on average, investments in that market will yield a zero
NPV. Investors get exactly what they pay for when they
buy a security in an efficient market and firms get
exactly what their stocks and bonds are worth when
they sell them.

Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #262
Type: Essay

263. Do you think the lessons from capital market history

will hold for each year in the future? That is, as an
example, if you buy small stocks will your investment
always outperform Treasury bills?

The student should realize that we are working with

averages, so they should not expect riskier assets to
always outperform less risky assets. The student should
explain somewhere in their answer that this gets to the
heart of what risk is. That is, the reason you expect to
earn a higher return over the long haul is that your
variability in price from year to year can be significant.

Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #263
Type: Essay
264. Suppose your cousin invests in the stock market and
doubles her money in a single year while the market, on
average, earned a return of only about 15%. Is your
cousin's performance a violation of market efficiency?

No, market efficiency does not preclude investors from

"beating the market." It is entirely possible to earn
higher returns than the market at times. However, if
your cousin is able to do so consistently, then there
would certainly be some doubt cast upon market
efficiency.

Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #264
Type: Essay

265. How do you think the stock market would be affected if

the laws were changed so that trading on insider
information was no longer illegal? What would be the
impact on the goal of the financial manager if such a
change were to occur?

This open-ended question allows students to ponder

market efficiency from a different angle. By allowing
insiders to trade on their information, it would be
possible for insiders to take advantage of uninformed
investors. This may keep some investors out of the
market because they would perceive the prices
observed as no longer being "fair. " This change would
provide a serious blow to the efficiency of the market
and would also further complicate the issue of who's
interest managers are working to satisfy.

Difficulty: Challenge
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #265
Type: Essay
266. Why should a financial decision maker such as a
corporate treasurer or CFO be concerned with market
efficiency?

Good answers to this question might indicate that

market efficiency is a necessary condition for the
"Maximize Shareholder Wealth" rule. Unless we are
confident that the market price is an economically
meaningful number, seeking to maximize it is silly.
Similarly, students should recognize that there is a very
strong link between managerial decisions and the value
of the firm, as reflected in security prices. Finally, as a
preview of the cost of capital discussion in later
chapters, instructors might point out that market
efficiency ensures that the required returns on new
securities will be directly related to the risk-return
profile of the firm (and, therefore, to managerial
actions).

Difficulty: Challenge
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #266
Type: Essay

267. Retirees with limited income and small investment

portfolios are generally perceived as facing a real
dilemma when it comes to investment risk and return.
Explain this dilemma and what its implications are for
the retirees.

This question is designed to help students realize that

higher rates of return also represent higher possibilities
of investment losses, especially in the short-term. While
retirees may need a high return, they cannot afford the
short-term risk to their principal and therefore are
generally forced to accept lower returns.

Difficulty: Intermediate
Learning Objective: 12-03 The historical risks on various important types of investments.
Ross - Chapter 12 #267
Type: Essay
268. There is a common saying among investment
professionals that "past performance does not guarantee
future returns." If this statement is correct, then why is
it important to understand the past performance of
various asset classes?

Student answers will vary. One general theme might be

that history provides a basis for comparison along with
a general understanding of the risk-return tradeoff.
Historical performance also provides investors with
some understanding of what they can reasonably expect
to earn. These expectations affect the prices investors
are willing to pay, thereby tending to keep the
performance of an asset class within its historical
averages.

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #268
Type: Essay

269. The Government has insider trading laws which punish

individuals who trade in the securities markets using
information that is not publicly known. Explain how
these laws might affect the degree of market efficiency
that currently exists in our capital markets.

Student answers will vary but should illustrate an

understanding of the difference between semi-strong
form efficiency and strong form market efficiency. An
argument can be made that the insider trading laws
prevent our markets from being strong form efficient.
An argument can also be made that even though insider
trading laws exist, the odds of being caught might be
slim, and thus some insider trading exists. If this is so,
then our markets are somewhere between semi-strong
and strong form efficient.

Difficulty: Intermediate
Learning Objective: 12-04 The implications of market efficiency.
Ross - Chapter 12 #269
Type: Essay
270. How can studying the historical record of our financial
markets and inflation help you better prepare
financially for your future?

Student answers will vary but the question should get

students thinking. The historical record illustrates that
both inflation and the return on any investment can be
quite unpredictable over the short-term. The record also
illustrates that the state of the national economy as well
as world events play a major role in the performance of
the markets. Understanding the past performance of the
markets should help students realize that nothing is
guaranteed and that they should be prepared for
unexpected events and have a financial plan that is both
flexible and capable of withstanding market changes.
This question can also be used as a lead into a class
discussion.

Difficulty: Intermediate
Learning Objective: 12-02 The historical returns on various important types of investments.
Ross - Chapter 12 #270
Type: Essay
Chapter 12 Lessons from Capital Market History Summary