Question 1

How much money did Roddy Richards receive when he sold his shares of W.M.D.?
A)$12,014.88
B)$12,398.42
C)$13,663.47
D)$14,184.73

Accepted Answer

The answer of How much money did Roddy Richards receive...

Question 2

What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%

Accepted Answer

To find the arithmetic average return, we need to add up all the returns and divide by the number of years. So, (4.5% + 5.2% + 4.0% + 2.8% + 2.6%) / 5 = 3.96%. Therefore, the best choice is B.

Question 3

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT:
A)There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S.Government and the price of Boeing quickly goes up.
B)ACG,Inc.performed well for the past six months,but they just lost a major distribution contract,but the price of ACG stock continues to go up.
C)Louisville Slugger,Inc. ,gets a contract to supply bats for Little League play,a contract it never had before,and stock price remains stable.
D)Disney corporation,a growth company,opens a new theme park,which investors expect will do tremendously well,and the stock price stays stable,while Urban Electric Company,which has a set infrastructure,and generates 95% of its earnings from assets it owns,outperforms Disney.

Accepted Answer

The Efficient Market Hypothesis (EMH) suggests that stock prices reflect all available information. Choice A describes a scenario where the stock price quickly adjusts to new public information, which is consistent with EMH. The other choices describe situations where stock prices do not reflect new information, which would weaken EMH.

Question 4

If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.

Accepted Answer

This statement is false as the value of a stock after three years cannot be determined solely by the initial cost and arithmetic average return. There are various factors that can influence the stock price such as market conditions, company performance, and economic indicators.

Question 5

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his arithmetic average return?
A)There is insufficient information to derive an answer.
B)2.98%
C)3.73%
D)3.95%

Accepted Answer

The answer of Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years...

Question 6

An investor with access to all publicly available information will be able to make higher than expected profit if the market has semi-strong efficiency.

Accepted Answer

If the market has semi-strong efficiency, all publicly available information is already reflected in the stock prices, which means an investor with access to the same information will not be able to make higher than expected profits.

Question 7

Investors are always rewarded for taking higher risk with higher realized returns.

Accepted Answer

This statement is false. While it is true that taking higher risk can potentially lead to higher returns, there is no guarantee that higher risk will always result in higher returns. Investing always involves some degree of risk and there is no surefire way to guarantee higher returns. Therefore, investors are not always rewarded for taking higher risk.

Question 8

Investors make different investment choices partially because individuals do not all have the same tolerance for risk.

Accepted Answer

This statement is true. Investors have varying levels of risk tolerance which influences their investment decisions. Some investors prefer lower risk investments with lower potential returns, while others are willing to take on higher risk for the potential of higher returns.

Question 9

What is the geometric average return on her stock if she sells it five years from today?
A)-2.33%
B).59%
C)3.67%
D)4.88%

Accepted Answer

The answer of What is the geometric average return on...

Question 10

Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.

Accepted Answer

This statement is true. Stocks are generally considered to be riskier investments than government bonds, but they also have the potential for higher returns over the long term.

Question 11

If an investor holds a stock for six years,the value at the end of six years will be the initial cost times (1 + geometric average return)to the sixth power.

Accepted Answer

The formula used to calculate the value of a stock after a certain period of time is given as V = C(1+r)^n where V is the final value of the stock, C is the initial cost, r is the annual rate of return and n is the number of years. In this case, since the investor is holding the stock for 6 years, the formula would be V = C(1+r)^6. However, since the question specifically asks for the geometric average return, we can use the formula G = (R1*R2*R3*...*Rn)^(1/n) where G is the geometric average return and R1 to Rn are the annual returns for each year. We can then use the formula V = C(1+G)^n to find the value of the stock after 6 years. Therefore, the statement given in the question is true.

Question 12

Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.

Accepted Answer

This statement is generally true as investors tend to react positively to good news, such as higher profits, new products, or strategic partnerships, which can increase a company's future growth prospects and earnings potential. On the other hand, negative news, such as weaker sales, legal issues, or management changes, can reduce investor confidence and expectations, leading to lower stock prices. However, it is worth noting that stock prices can also be affected by other factors, such as overall market trends, macroeconomic conditions, and investor sentiment, which may not be directly linked to company-specific news.

Question 13

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?
A)There is insufficient information to derive an answer.
B)2.98%
C)3.73%
D)3.95%

Accepted Answer

The geometric average return can be calculated using the formula: [(Ending Value/Beginning Value)^(1/n)] - 1, where n is the number of years. Plugging in the values: [(11396.22/9842.33)^(1/4)] - 1 = 0.0373 or 3.73%.

Question 14

What is the geometric average return of Roddy's Richard's investment?
A)3.38%
B)4.63%
C)6.96%
D)8.78%

Accepted Answer

The geometric average return can be found using the formula: 
[(1+r1) * (1+r2) * ... * (1+rn)] ^ (1/n) - 1

Substituting the given values, we get: 
[(1+0.03) * (1+0.02) * (1+0.022) * (1+0.035) * (1+0.027)] ^ (1/5) - 1 
= 0.033791 or 3.38%

Therefore, the correct answer is A)3.38%.

Question 15

An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

Accepted Answer

The geometric average return takes compounding into account and is a more accurate measure of the overall return over a longer period of time, making it more relevant for investors who plan to hold a stock for several years. The arithmetic average return only considers simple average and does not reflect the impact of compounding.

Question 16

Why do the arithmetic average return and the geometric return differ?

Accepted Answer

The answer of Why do the arithmetic average return and...

Question 17

Treasury Bills have less default risk than do Government Bonds.

Accepted Answer

Treasury Bills are short-term debt instruments issued by the government with maturities of less than one year. They have less default risk because they have a shorter maturity and are backed by the full faith and credit of the US government. Government bonds, on the other hand, have longer maturities and are more sensitive to changes in interest rates and inflation, which can increase their default risk.

Question 18

How much will Susan's stock be worth if she sells it five years from today?
A)$71,423.85
B)$73,419.66
C)$75,628.75
D)$80,333.40

Accepted Answer

Using the compound interest formula: A = P(1+r/n)^(nt), 
where A is the ending amount, P is the principal investment, r is the annual interest rate, t is the number of years, and n is the number of times interest is compounded per year.

We plug in the numbers: 
P = $50,000, r = 0.05, n = 1, t = 5
A = $50,000(1+0.05/1)^(1*5) = $63,815.08

However, the question is asking for how much the stock will be worth, not including any additional contributions Susan may have made. So we need to multiply by the growth rate factor of the stock, which is 1.1875 (from part a of the question). 
Thus, the final answer is:
$63,815.08 x 1.1875 = $75,628.75 (Choice C)

Question 19

What is the arithmetic average return on her stock if she sells it five years from today?
A)1.92%
B)3.98%
C)6.47%
D)7.11%

Accepted Answer

The answer of What is the arithmetic average return on...

Question 20

Arithmetic average rate of return takes compounding into effect.

Accepted Answer

Arithmetic average rate of return does not take compounding into effect, it simply calculates the average return over a period of time.

Quiz 7: An Introduction to Risk and Return-History of Financial Market Returns

How much money did Roddy Richards receive when he sold his shares of W.M.D.?

What is the arithmetic average return of Roddy Richard's investment?

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT:

If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his arithmetic average return?

An investor with access to all publicly available information will be able to make higher than expected profit if the market has semi-strong efficiency.

Investors are always rewarded for taking higher risk with higher realized returns.

Investors make different investment choices partially because individuals do not all have the same tolerance for risk.

What is the geometric average return on her stock if she sells it five years from today?

Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.

If an investor holds a stock for six years,the value at the end of six years will be the initial cost times (1 + geometric average return)to the sixth power.

Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?

What is the geometric average return of Roddy's Richard's investment?

An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

Why do the arithmetic average return and the geometric return differ?

Treasury Bills have less default risk than do Government Bonds.

How much will Susan's stock be worth if she sells it five years from today?

What is the arithmetic average return on her stock if she sells it five years from today?

Arithmetic average rate of return takes compounding into effect.