Question 1

Which one of the following assets has historically had the highest average annual return?
A) common stocks
B) long-term corporate bonds
C) long-term government bonds
D) U.S. Treasury bills

Accepted Answer

Historically, common stocks have had the highest average annual return among the given options. While their returns are volatile and subject to market fluctuations, over the long term, they have tended to outperform other asset classes. Long-term corporate bonds and government bonds have lower returns but are less risky, while U.S. Treasury bills have the lowest returns but are the safest investment option.

Question 2

After controlling for risk, if someone were able to earn greater than the average returns for the market on a consistent basis using publicly available information, which form of market efficiency is violated?
A) none of forms would be violated
B) semi-strong
C) strong
D) all of the forms of market efficiency would be violated,

Accepted Answer

If someone is able to consistently earn above-average returns using publicly available information, it suggests that the market is not semi-strong efficient, as public information is quickly reflected in prices. It does not necessarily imply that other forms of market efficiency (such as weak or strong) are violated.

Question 3

If one were to rank different assets from highest to lowest the basis of average historical return, the ranking would be:
A) long-term corporate bonds, large company stocks, long term government bonds, US Treasury bills
B) large company stocks, long-term corporate bonds, long term government bonds, US Treasury bills
C) US Treasury bills, long term government bonds, long term corporate bonds, large company stocks
D) US Treasury bills, long term corporate bonds, long term government bonds, large company stocks

Accepted Answer

According to historical data, large company stocks have had the highest average return, followed by long-term corporate bonds, long-term government bonds, and US Treasury bills. Therefore, option B correctly ranks these assets in order from highest to lowest average return.

Question 4

Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .45 and .30, and the returns associated with those states of nature are 10%, 12%, and 16% for asset X. Based on this information, the expected return and standard deviation of return are:
A) 12.0% and 4.0%
B) 12.7% and 2.3%
C) 12.7% and 4.0%
D) 12.0% and 2.3%

Accepted Answer

The expected return (ER) is calculated as the sum of each state's return multiplied by its probability: ER = (0.25 * 10%) + (0.45 * 12%) + (0.30 * 16%) = 2.5% + 5.4% + 4.8% = 12.7%. The standard deviation (SD) requires calculating the variance first, which involves the squared differences between each state's return and the ER, each weighted by its probability, and then taking the square root of the variance. The calculation for variance (Var) is: Var = (0.25 * (10% - 12.7%)^2) + (0.45 * (12% - 12.7%)^2) + (0.30 * (16% - 12.7%)^2). This simplifies to Var = (0.25 * 7.29) + (0.45 * 0.49) + (0.30 * 10.89) = 1.8225 + 0.2205 + 3.267 = 5.31. The square root of 5.31 gives the standard deviation, which is approximately 2.3%. Therefore, the expected return is 12.7% and the standard deviation is approximately 2.3%.

Question 5

The strong-form efficient market implies that:
A) every investor can consistently beat the market after adjusting for risk differences
B) stock prices reflect all public and private knowledge
C) corporate officers and insiders can earn above-average, risk-adjusted profits
D) all future returns can be predicted for investments if the beta is known

Accepted Answer

The answer of The strong-form efficient market implies that:
A) every...

Question 6

As defined in accordance with efficient markets notions, a weak-form efficient market would be a market in which asset prices reflect all:
A) current information
B) past information
C) inside information
D) public information

Accepted Answer

In a weak-form efficient market, asset prices reflect all past information, meaning that historical prices and data are already incorporated into current asset prices.

Question 7

The risk caused by variations in income before taxes over time because fixed interest expenses do not change when operating income rises or falls is called:
A) financial risk
B) business risk
C) tax risk
D) purchasing power risk

Accepted Answer

Financial risk is the risk caused by variations in income before taxes over time. This is because fixed interest expenses, such as debt payments, do not change when operating income rises or falls. Business risk, on the other hand, refers to the risk of operating in a particular industry or market. Tax risk is the risk of adverse tax consequences, and purchasing power risk is the risk of inflation reducing the value of money over time.

Question 8

Between 1928 and 2018, the average annual return on common stocks averaged _____%, while the average annual return on Treasury bonds averaged _____%.
A) 11.36, 5.1
B) 11.11, 3.8
C) 11.36, 3.2
D) 11.11, 2.9

Accepted Answer

Historically, between 1928 and 2018, common stocks have provided an average annual return of approximately 11.36%, while Treasury bonds have offered an average annual return of around 5.1%. This reflects the general trend that stocks, while more volatile, tend to offer higher returns over the long term compared to more stable, fixed-income investments like Treasury bonds.

Question 9

Between 1928 and 2018, the average annual return on Treasury Bills averaged _____%, while the average annual inflation rate averaged _____%.
A) 5.4, 3.07
B) 3.4, 3.06
C) 3.8, 5.4
D) 3.2, 3.8

Accepted Answer

According to historical data, between 1928 and 2018, the average annual return on Treasury Bills was 3.4%, while the average annual inflation rate was 3.06%. This makes option B the correct choice.

Question 10

A statistical concept that relates movements in one set of returns to movements in another set over time is called:
A) variance
B) standard deviation
C) coefficient of variation
D) correlation

Accepted Answer

The statistical concept that relates movements in one set of returns to movements in another set over time is called correlation, which measures the degree to which two variables are linearly related. Variance and standard deviation are measures of the variability or dispersion of a set of data, while the coefficient of variation is a measure of relative variability.

Question 11

Research on the weak-form efficient market suggests that:
A) past trends cannot be used to predict the future
B) technical analysis has limited value
C) stock prices follow a random walk
D) all of the above

Accepted Answer

The weak-form efficient market hypothesis states that past trends cannot be used to predict the future, therefore technical analysis, which relies on past trends, has limited value. Instead, stock prices are believed to follow a random walk, making it impossible to consistently predict future stock prices based on past performance. Therefore, all of the above choices are correct.

Question 12

In an efficient market:
A) it is fairly easy to find stocks whose prices do not fairly reflect the present value of future expected cash flows
B) expected news will cause a rapid change in prices
C) information flows are random, both in timing and in content
D) all the above

Accepted Answer

In an efficient market, information flows are random in timing and content, making it difficult to predict stock price movements based on available information.

Question 13

In comparing the deviations of returns, which one of the following assets has historically had the largest standard deviation of annual returns?
A) large company stocks
B) long-term corporate bonds
C) long-term government bonds
D) U.S. Treasury bills

Accepted Answer

Historically, large company stocks have had the largest standard deviation of annual returns compared to long-term corporate bonds, long-term government bonds, and U.S. Treasury bills, indicating higher volatility and risk.

Question 14

If prices in a particular market fully reflect all public and private knowledge, the market is efficient in the:
A) weak form
B) semi-strong form
C) strong form
D) both a and b

Accepted Answer

Strong form efficiency of a market indicates that in addition to public knowledge, even private or insider knowledge is incorporated into the prices of securities. Therefore, if prices in a market fully reflect all public and private knowledge, the market is efficient in the strong form. Weak form efficiency only takes into account past prices and trends, while semi-strong form efficiency considers public information such as financial statements and news announcements.

Question 15

In an efficient market which of the following would not be expected to cause a quick price change in the stock of a company?
A) an unexpected announcement by a major competitor
B) higher than predicted earnings announcement
C) unexpected death of CEO
D) all the above would be expected to cause a quick price change

Accepted Answer

In an efficient market, all new information is quickly incorporated into stock prices. Therefore, an unexpected announcement by a major competitor, higher than predicted earnings, and the unexpected death of a CEO would all be expected to cause a quick price change as they represent significant new information about the company's current or future performance.

Question 16

A fruit company has 20% returns in periods of normal rainfall and -3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit company's expected returns be?
A) 24%
B) 10.8%
C) 0
D) cannot determine from the information given

Accepted Answer

Expected return =
(0.2 x 0.6) + (-0.03 x 0.4) = 0.12 - 0.012 = 0.108 = 10.8%

Question 17

As defined in accordance with efficient markets notions, a strong-form efficient market would be a market in which asset prices reflect all:
A) past information
B) current information
C) public information
D) public and private information

Accepted Answer

In a strong-form efficient market, asset prices reflect both public and private information, meaning that all information available (past, current, and non-public) is already reflected in the asset prices.

Question 18

Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .55 and .20, and the returns associated with those states of nature are 5%, 10%, and 13% for asset Y. Based on this information, the expected return, standard deviation, and coefficient of variation for asset Y are:
A) 10.50%, 2.96% and 0.395 respectively
B) 10.35%, 2.86% and 0.345 respectively
C) 9.35%, 7.63% and 0.816 respectively
D) 9.35%, 2.76% and 0.295 respectively

Accepted Answer

The answer of Assume the probability of a pessimistic, most...

Question 19

If a person requires greater return when risk increases, that person is said to be:
A) risk seeking
B) risk averse
C) risk aware
D) risk indifferent

Accepted Answer

Risk aversion is the concept in finance and economics that explains a person's preference for certainty over uncertainty, with a greater return required to compensate for increased risk. This means that a risk-averse individual will demand higher returns as compensation for taking on more risk.

Question 20

Which one of the following is not considered to be a generally recognized type of market efficiency?
A) strong-form
B) semi-strong form
C) weak-form
D) insider-information form

Accepted Answer

The three generally recognized types of market efficiency are weak-form, semi-strong form, and strong-form. Insider-information form is not considered to be a recognized type of market efficiency.

Quiz 12: Financial Return and Risk Concepts

Which one of the following assets has historically had the highest average annual return?

After controlling for risk, if someone were able to earn greater than the average returns for the market on a consistent basis using publicly available information, which form of market efficiency is violated?

If one were to rank different assets from highest to lowest the basis of average historical return, the ranking would be:

Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .45 and .30, and the returns associated with those states of nature are 10%, 12%, and 16% for asset X. Based on this information, the expected return and standard deviation of return are:

The strong-form efficient market implies that:

As defined in accordance with efficient markets notions, a weak-form efficient market would be a market in which asset prices reflect all:

The risk caused by variations in income before taxes over time because fixed interest expenses do not change when operating income rises or falls is called:

Between 1928 and 2018, the average annual return on common stocks averaged _%, while the average annual return on Treasury bonds averaged _%.

Between 1928 and 2018, the average annual return on Treasury Bills averaged _%, while the average annual inflation rate averaged _%.

A statistical concept that relates movements in one set of returns to movements in another set over time is called:

Research on the weak-form efficient market suggests that:

In an efficient market:

In comparing the deviations of returns, which one of the following assets has historically had the largest standard deviation of annual returns?

If prices in a particular market fully reflect all public and private knowledge, the market is efficient in the:

In an efficient market which of the following would not be expected to cause a quick price change in the stock of a company?

A fruit company has 20% returns in periods of normal rainfall and -3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit company's expected returns be?

As defined in accordance with efficient markets notions, a strong-form efficient market would be a market in which asset prices reflect all:

If a person requires greater return when risk increases, that person is said to be:

Which one of the following is not considered to be a generally recognized type of market efficiency?