Question 1

Provide a definition for the concept of standard deviation.

Accepted Answer

The answer of Provide a definition for the concept of...

Question 2

Provide a definition for the concept of value at risk (VaR).

Accepted Answer

The answer of Provide a definition for the concept of...

Question 3

The average compound return earned per year over a multi-year period is called the _____ average return.

Accepted Answer

The geometric average return is used to calculate the average compound return earned per year over a multi-year period, and takes into account the compounding effect of returns. It is a more accurate measure of the true return earned over the period, compared to the arithmetic average return which does not account for compounding.

Question 4

Provide a definition for the concept of efficient capital market.

Accepted Answer

The answer of Provide a definition for the concept of...

Question 5

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.

Accepted Answer

The income component of an asset's return on investment reflects the cash you receive directly while you own the investment, such as dividends on stocks or interest on bonds.

Question 6

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?

Accepted Answer

The answer of There is a common saying among investment...

Question 7

Provide a definition for the concept of efficient markets hypothesis (EMH).

Accepted Answer

The answer of Provide a definition for the concept of...

Question 8

The return earned in an average year over a multi-year period is called the _____ average return.

Accepted Answer

The arithmetic average return calculates the return earned in an average year over a multi-year period by summing the annual returns and dividing by the number of years.

Question 9

How can studying the historical record of our financial markets and inflation help you better prepare financially for your future?

Accepted Answer

The answer of How can studying the historical record of...

Question 10

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?

Accepted Answer

The answer of Fred made the following rates of return...

Question 11

An efficient market is defined as one where all investments in that market are ____ investments.

Accepted Answer

In an efficient market, all investments are priced perfectly according to their risk and return, meaning any potential profits from undervalued investments are immediately corrected by the market. Thus, no investment offers a positive net present value (NPV) opportunity, as prices reflect all available information. This leads to investments having a zero net present value, indicating that they are fairly priced and investors cannot expect to earn an abnormal return above the market rate.

Question 12

Provide a definition for the concept of arithmetic average return.

Accepted Answer

The answer of Provide a definition for the concept of...

Question 13

Provide a definition for the concept of variance.

Accepted Answer

The answer of Provide a definition for the concept of...

Question 14

The historical record demonstrates that the risk of loss decreases when the _____ increases.

Accepted Answer

The risk of loss decreases when the time horizon increases because investing over a longer period typically allows for the smoothing out of short-term market fluctuations and volatility, providing a better chance for investments to recover and grow.

Question 15

Provide a definition for the concept of normal distribution.

Accepted Answer

The answer of Provide a definition for the concept of...

Question 16

Provide a definition for the concept of risk premium.

Accepted Answer

The answer of Provide a definition for the concept of...

Question 17

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:

Accepted Answer

Strong form efficiency posits that all information, both public and private (insider information), is already reflected in stock prices, meaning no one can consistently achieve higher returns.

Question 18

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.

Accepted Answer

The answer of Retirees with limited income and small investment...

Question 19

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?

Accepted Answer

The answer of Coming out of the depression, small stocks...

Question 20

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?

Accepted Answer

The answer of Suppose you have $30,000 invested in the...

Quiz 12: Lessons From Capital Market History

Provide a definition for the concept of standard deviation.

Provide a definition for the concept of value at risk (VaR).

The average compound return earned per year over a multi-year period is called the _____ average return.

Provide a definition for the concept of efficient capital market.

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.

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?

Provide a definition for the concept of efficient markets hypothesis (EMH).

The return earned in an average year over a multi-year period is called the _____ average return.

How can studying the historical record of our financial markets and inflation help you better prepare financially for your future?

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?

An efficient market is defined as one where all investments in that market are ____ investments.

Provide a definition for the concept of arithmetic average return.

Provide a definition for the concept of variance.

The historical record demonstrates that the risk of loss decreases when the _____ increases.

Provide a definition for the concept of normal distribution.

Provide a definition for the concept of risk premium.

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:

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.

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?