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| 1 | |
If insiders were allowed to profit on their inside information without penalty, financial markets would be more efficient. |
| | A) | True |
| | B) | False |
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| 2 | |
Investors shouldn't count capital gains as a part of their total return until a security is sold, since the capital gain is really only a "paper gain" up to that point. |
| | A) | True |
| | B) | False |
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| 3 | |
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. |
| | A) | True |
| | B) | False |
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| 4 | |
In general, the greater the potential reward, the greater the risk. |
| | A) | True |
| | B) | False |
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| 5 | |
A normal distribution is a symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation. |
| | A) | True |
| | B) | False |
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| 6 | |
When calculating your return on investment you should ignore: |
| | A) | paper gains. |
| | B) | losses you avoided by not buying a stock that has since decreased in price. |
| | C) | dividends that have been declared on a stock you own if you have not yet received the dividend. |
| | D) | paper capital losses. |
| | E) | fees you are charged in the process of purchasing a security. |
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| 7 | |
Which one 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) | Based on historical data, there is no reward for bearing risk. |
| | D) | An increase in the risk of an investment will result in a decreased risk premium. |
| | E) | In general, the higher the expected return, the higher the risk. |
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| 8 | |
After careful analysis of previous stock prices, you discover you can make above normal returns on your investments if you buy oil company stocks just before noon on any given trading day and then sell them immediately before the market closes that day. This is: |
| | A) | not a violation of market efficiency. |
| | B) | a violation of weak form efficiency. |
| | C) | a violation of semistrong form efficiency. |
| | D) | a violation of strong form efficiency. |
| | E) | a violation of all forms of market efficiency. |
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| 9 | |
The lessons from capital market history tell us that:
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 NYSE stock exchange is an inefficient market. |
| | A) | I only |
| | B) | II only |
| | C) | I and II only |
| | D) | I and III only |
| | E) | I, II, and III |
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| 10 | |
Over the 1926 to 2004 period, the nominal risk premium on long-term government bonds has averaged _____ percent per year. |
| | A) | 0.0 |
| | B) | 2.0 |
| | C) | 2.2 |
| | D) | 8.8 |
| | E) | 13.4 |
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| 11 | |
Which one of the following asset classes has displayed the flattest and widest distribution of returns over the 1926-2004 period? Assume that annual security returns are normally distributed. |
| | A) | large company stocks |
| | B) | long-term corporate bonds |
| | C) | small company stocks |
| | D) | long-term government bonds |
| | E) | U.S. Treasury bills |
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| 12 | |
An investment earned the following returns over a four-year period: 28 percent, 21 percent, 1 percent, and -36 percent. What is the variance of the returns on this investment? |
| | A) | 0.0618 |
| | B) | 0.0824 |
| | C) | 0.1400 |
| | D) | 0.1739 |
| | E) | 0.2473 |
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| 13 | |
Given the following historical returns, what is the variance?
| Year | | Return | | 1 | | 7 percent | | 2 | | 3 percent | | 3 | | 19 percent | | 4 | | -11 percent | | 5 | | -1 percent |
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| | A) | .009664 |
| | B) | .012080 |
| | C) | .034018 |
| | D) | .039644 |
| | E) | .048322 |
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| 14 | |
Suppose you purchased 500 shares of Jet-Electro Corporation stock at a price of $22.50 per share. One year later, the shares are selling for $21 each. In addition, a dividend of $1.50 per share was paid at the end of the period. What is the percentage return on the investment? |
| | A) | -7.1 percent |
| | B) | -6.7 percent |
| | C) | 0.0 percent |
| | D) | 6.7 percent |
| | E) | 7.1 percent |
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| 15 | |
You own a stock which has produced annual returns of 11 percent, 3 percent, 8 percent, and 14 percent over the past four years, respectively. The arithmetic rate of return is _____ percent and the geometric rate of return is _____ percent. |
| | A) | 8.50; 8.92 |
| | B) | 8.50; 18.92 |
| | C) | 9.00; 8.92 |
| | D) | 9.00; 9.92 |
| | E) | 9.00; 18.92 |
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