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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 actual returns and the
arithmetic average return.
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
efficient capital market
Which one of the following statements best defines the efficient market hypothesis?
All securities in an efficient market are zero net present value investments.
Which one of the following categories of securities has had the most volatile returns over
the period 1926-2007?
Which one of the following is a correct ranking of securities based on their volatility over
the period of 1926-2007? Rank from highest to lowest
small company stocks, long-term corporate bonds, intermediate-term
Which one of the following statements is correct?
The greater the volatility of returns, the greater the risk premium.
Which of the following correspond to a wide frequency distribution?
I. relatively low risk
II. relatively low rate of return
III. relatively high standard deviation
IV. relatively large risk premium
III and IV only
If the variability of the returns on large-company stocks were to increase over the long-
term, you would expect which of the following to occur as a result?
I. decrease in the average rate of return
II. increase in the risk premium
III. increase in the 68 percent probability range of the frequency distribution of returns
IV. decrease in the standard deviation
II and III only
Which one of the following statements is correct based on the historical record for the
Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.
What is the probability that small-company stocks will produce an annual return that is
more than one standard deviation below the average?
Which of the following statements are true based on the historical record for 1926-2007?
I. Risk and potential reward are inversely related.
II. Risk-free securities produce a positive real rate of return each year.
III. Returns are more predictable over the short-term than they are over the long-term.
IV. Bonds are generally a safer investment than are stocks.
Which two of the following are the most likely reasons why a stock price might not react
at all on the day that new information related to the stock issuer is released?
I. insiders knew the information prior to the announcement
II. investors need time to digest the information prior to reacting
III. the information has no bearing on the value of the firm
IV. the information was anticipated
III and IV only
Question Which one of the following is most indicative of a totally efficient stock market?
zero net present values for all stock investments
Question Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock.
Question Efficient financial markets fluctuate continuously because:
the markets are continually reacting to new information.
Question According to theory, studying historical stock price movements to identify mispriced
is ineffective even when the market is only weak form efficient.
Which of the following statements related to market efficiency tend to be supported by
I. Markets tend to respond quickly to new information.
II. It is difficult for investors to earn abnormal returns.
III. Short-run prices are difficult to predict accurately based on public information.
IV. Markets are most likely weak form efficient
I, II, and III only
Question If you excel in analyzing the future outlook of firms, you would prefer the financial
markets be ____ form efficient so that you can have an advantage in the marketplace.
You are aware that your neighbor trades stocks based on confidential information he
overhears at his workplace. This information is not available to the general public. This neighbor
continually brags to you about the profits he earns on these trades. Given this, you would tend to
argue that the financial markets are at best _____ form efficient.
The U.S. Securities and Exchange Commission periodically charges individuals with
insider trading and claims those individuals have made unfair profits. Given this, you would be
most apt to argue that the markets are less than _____ form efficient.
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