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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Some Lessons from Capital Market History

Quick Quiz 1

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.


1	Which of the following assets likely has the highest level of risk?
		A)	Long-term corporate bonds.
		B)	Treasury bills.
		C)	Long-term government bonds.
		D)	Small capitalization Canadian Stocks.
		E)	Common stock of the largest companies listed on the TSE.


2	Which of the following is true about risk and return?
		A)	Riskier assets will, on average, earn lower returns.
		B)	The reward for bearing risk is known as the standard deviation.
		C)	In general, the greater the risk from a risky investment, the greater the required reward.
		D)	An increase in the risk of an investment will result in a decreased risk premium.
		E)	Based on historical data, there is no reward for bearing risk.


3	Which of the following is implied by the evidence regarding market efficiency?
		A)	It is difficult to predict future price movements based on public information.
		B)	There is a simple way to identify mispriced stocks when they exist.
		C)	Prices don't respond rapidly to new information.
		D)	Prices in well-organized capital markets are unfair.
		E)	Insiders cannot make money from their private information.


4	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)	This is a violation of semi-strong form efficiency.
		B)	This is a violation of weak form efficiency.
		C)	This is not a violation of market efficiency.
		D)	This is a violation of strong form efficiency.
		E)	This is a violation of all forms of market efficiency.


5	Over the past 50 years, which of the following investments has been considered the most risky?
		A)	Corporate bonds
		B)	Common stocks
		C)	Treasury bills
		D)	Government bonds
		E)	Small company stocks


6	The standard deviation for a set of stock returns can be calculated as:
		A)	The positive square root of the average return.
		B)	The average squared difference between the actual return and the average return.
		C)	The positive square root of the variance.
		D)	The average return divided by N minus one, where N is the number of returns.
		E)	The variance squared.


7	In an efficient market, how would you expect the price of a stock to react to the unexpected release of new information about the firm?
		A)	The price should adjust over a few days to reflect the new information.
		B)	The price should adjust immediately to reflect the new information.
		C)	The price should initially overreact to the information, and then adjust over the next few days to reflect the new information.
		D)	The information should have no effect on the price of the stock.
		E)	Market efficiency does not say anything about the reaction of stock prices to the release of information.


8	Over the 1948-1999 period, the nominal risk premium on long-term bonds has averaged __________ per year.
		A)	0.0%
		B)	9.4%
		C)	1.6%
		D)	1.9%
		E)	13.6%


9	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)	-27.4 to 53.8
		B)	-7.1 to 33.5
		C)	-27.4 to 33.5
		D)	-5.1 to 45.7
		E)	7.1 to 33.5


10	Which of the following does research in capital market history say about market efficiency? I. Prices appear to react very quickly to new information II. Future market prices are very difficult to predict based on publicly available information III. If mispriced stocks do exist, there is no obvious means of identifying them.
		A)	I only
		B)	II and III only
		C)	III only
		D)	I and II only
		E)	I, II, and III only.

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