chapter 12

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

• risk premium

• geometric return

• arithmetic

• standard deviation

• variance

Which one of the following best defines the variance of an investment's annual returns over a number of years?

• The average squared difference between the arithmetic and the geometric average annual returns

• The squared summation of the differences between the actual returns and the average geometric return

• The average difference between the annual returns and the average return for the period

• The difference between the arithmetic average and the geometric average return for the period

• The average squared difference between the actual returns and the arithmetic average return

Standard deviation is a measure of which one of the following?

• average rate of return

• volatility

• probability

• risk premium

• real returns

Which one of the following is defined by its mean and its standard deviation?

• arithmetic nominal return

• geometric real return

• normal distribution

• variance

• risk premium

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

• arithmetic

• standard

• variant

• geometric

• real

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

• arithmetic

• standard

• variant

• geometric

• real

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?

• riskless market

• evenly distributed market

• zero volatility market

• Blume's market

• efficient capital market

Which one of the following statements best defines the efficient market hypothesis?

• Efficient markets limit competition

• Security prices in efficient markets remain steady as new information becomes available

• Mispriced securities are common in efficient markets

• All securities in an efficient market are zero net present value investments

• Profits are removed as a market incentive when markets become efficient

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment?

• The dividend yield is expressed as a percentage of the selling price

• The capital gain would have been less had Stacy not received the dividends

• The total dollar return per share is $3

• The capital gains yield is positive

• The dividend yield is greater than the capital gains yield

Which one of the following correctly describes the dividend yield?

• next year's annual dividend divided by today's stock price

• this year's annual dividend divided by today's stock price

• this year's annual dividend divided by next year's expected stock price

• next year's annual dividend divided by this year's annual dividend

• the increase in next year's dividend over this year's dividend divided by this year's dividend