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Exam 12: Some Lessons From Capital Market History

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Question 21

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You bought one of Great White Shark Repellant Co.'s 10 percent coupon bonds one year ago for $815.These bonds pay annual payments,have a face value of $1,000,and mature 14 years from now.Suppose you decide to sell your bonds today when the required return on the bonds is 14 percent.The inflation rate over the past year was 3.7 percent.What was your total real return on this investment?

A) 2.97 percent
B) 1.75 percent
C) 1.18 percent
D) 3.44 percent
E) 2.58 percent

F) D) and E)
G) A) and B)

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Question 22

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The primary purpose of Blume's formula is to:

A) compute an accurate historical rate of return.
B) determine a stock's true current value.
C) consider compounding when estimating a rate of return.
D) determine the actual real rate of return.
E) project future rates of return.

F) B) and E)
G) All of the above

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Question 23

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Shawn earned an average return of 14.6 percent on his investments over the past 20 years while the S&P 500,a measure of the overall market,only returned an average of 13.9 percent.Explain how this can occur if the stock market is efficient.

A stock has returns of 18 percent,15 percent,-21 percent,and 6 percent for the past four years.Based on this information,what is the 95 percent probability range of returns for any one given year?

West Wind Tours stock is currently selling for $48 a share.The stock has a dividend yield of 3.2 percent.How much dividend income will you receive per year if you purchase 200 shares of this stock?

The real rate of return on a stock is approximately equal to the nominal rate of return:

As long as the inflation rate is positive,the real rate of return on a security will be ____ the nominal rate of return.

Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

Which one of the following statements is correct concerning market efficiency?

A stock had the following prices and dividends.What is the geometric average return on this stock? $\begin{array}{l}\underline { \text { Year } } \text { Price Dividend }\\\begin{array} { c c c } 1 & \$ 16.40 & - \\2 & \$ 16.10 & \$ 0.50 \\3 & \$ 15.48 & \$ 0.50 \\4 & \$ 9.15 & \$ 0.75\end{array}\end{array}$

A stock has annual returns of 6 percent,14 percent,-3 percent,and 2 percent for the past four years.The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

Define and explain the three forms of market efficiency.

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately.If the dividend yield remains at its pre-announcement level,then you know the stock price:

Efficient financial markets fluctuate continuously because:

What was the highest annual rate of inflation during the period 1926-2010?

You own 400 shares of Western Feed Mills stock valued at $51.20 per share.What is the dividend yield if your annual dividend income is $352?

According to theory,studying historical stock price movements to identify mispriced stocks:

You just sold 600 shares of Wesley,Inc.stock at a price of $32.04 a share.Last year,you paid $30.92 a share to buy this stock.Over the course of the year,you received dividends totaling $1.20 per share.What is your total capital gain on this investment?

Based on past 23 years,Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 10.5 percent.The geometric average return for the same period was 8.57 percent.What is the estimated return on this stock for the next 4 years according to Blume's formula?

Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent.Using Blume's formula,what is your best estimate of the future annual returns over the next 5 years?