Use the following to answer the following question(s).
Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago.
The investment had yearly arithmetic returns of -9.7%, -8.1%, 15%, 7.2%, and 15.4%.
3) What is the arithmetic average return of Roddy Richard’s investment?
A) 2.42%
B) 3.96%
C) 5.18%
D) 15.1%
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: arithmetic average return
Principles: Principle 1: Money Has a Time Value
4) What is the geometric average return of Roddy’s Richard’s investment?
A) 3.38%
B) 4.63%
C) 6.96%
D) 8.78%
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
5) 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
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
7
Copyright © 2011 Pearson Education, Inc.
Use the following information to answer the following question(s).
Susan Bright will get returns of 18%, -20.3%, -14%, 17.6%, and 8.3% in the next five years on
her investment in CoffeeTown, Inc. stock, which she purchases for $73,419.66 today.
6) 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%
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: arithmetic average return
Principles: Principle 1: Money Has a Time Value
7) 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%
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: geometric average return
Principles: Principle 1: Money Has a Time Value
8) 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
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: holding period return
Principles: Principle 1: Money Has a Time Value
9) Arithmetic average rate of return takes compounding into effect.
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
8
Copyright © 2011 Pearson Education, Inc.
10) 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.
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
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.
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
12) 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.
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
13) Why do the arithmetic average return and the geometric return differ?
20% the second year, and earned 15% the third year, the average arithmetic return would be 5%,
and the 20% gain the first year would be $200, but the 20% loss the second year would be $240.
3.35%, different from the average arithmetic return.
Topic: 7.3 Geometric vs. Arithmetic Average Rates of Return
Keywords: compound interest
Principles: Principle 1: Money Has a Time Value
9
1) Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT:
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.
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
2) Stock prices go up when there is positive information about a company, and go down when
there is negative information about the company.
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
3) 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.
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
4) If a market has weak form efficiency, an investor can make higher than expected profits by
studying the past price patterns of a stock.
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
10
5) If an individual with inside information can make higher than expected profits, the market is
no more than semi-strong form efficient.
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
6) Under the efficient market hypothesis, would securities be properly priced.
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
7) Are markets moving toward being more efficient or toward being less efficient?
Topic: 7.4 What Determines Stock Prices?
Keywords: efficient markets
Principles: Principle 4: Market Prices Reflect Information
11