978-0133423822 chapter 7 Part 2

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7.3 Geometric vs. Arithmetic Average Rates of Return

1) 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) 2.98%

B) 3.73%

C) 3.95%

D) There is insuicient information to derive an answer.

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and arithmetic average rates of return.

Keywords: holding period return

Principles: Principle 1: Money Has a Time Value

2) Michael Lynch invested $10,000 in the Rearguard Fund four years ago. All earnings

were reinvested in the fund. If his compound annual rate of return was 7%, what is his

investment worth today?

A) $1,310.80

B) $10,700

C) $12,800

D) $762.89

Question Status: New question

Objective: 7.3 Compute geometric (or compound) and arithmetic average rates of return.

Keywords: arithmetic average return

Principles: Principle 1: Money Has a Time Value

Use the following to answer the following question(s).

Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) ive 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%

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and 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%

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and 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

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and arithmetic average rates of return.

Keywords: compound interest

Principles: Principle 1: Money Has a Time Value

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 ive years

on her investment in CofeeTown, Inc. stock, which she purchases for $73,419.66 today.

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

A) 1.92%

B) 3.98%

C) 6.47%

D) 7.11%

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and 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 ive years from today?

A) -2.33%

B) .59%

C) 3.67%

D) 4.88%

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and 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 ive years from today?

A) $71,423.85

B) $73,419.66

C) $75,628.75

D) $80,333.40

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and 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 efect.

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and arithmetic average rates of return.

Keywords: compound interest

Principles: Principle 1: Money Has a Time Value

10) An investor who wishes to hold a stock for ive years will be most interested in

geometric average rather than in the arithmetic average return.

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and arithmetic average rates of return.

Keywords: compound interest

Principles: Principle 1: Money Has a Time Value

11) If an investor holds earns 10% on her investment in the irst year and loses 10% the

next year, she will have neither a gain nor a loss.

Question Status: New question

Objective: 7.3 Compute geometric (or compound) and 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.

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and 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 difer?

Question Status: Previous edition

Objective: 7.3 Compute geometric (or compound) and arithmetic average rates of return.

Keywords: compound interest

Principles: Principle 1: Money Has a Time Value

7.4 What Determines Stock Prices?

1) Each of the following would tend to weaken the Eicient 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) Muguet Company consistently underperforms the market in October, but outperforms

the market in May.

Question Status: Revised

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

2) Jayden spends a lot of time studying charts of stocks past performance, but his

investment return are only average. This outcome supports

A) the weak-form eicient market hypothesis.

B) the semi-strong form eicient market hypothesis.

C) the strong form eicient market hypothesis.

D) all of the above.

Question Status: New question

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

3) Which of the following is consistent with the eicient market hypothesis?

A) so-called value stocks outperform growth stocks.

B) stocks that have performed well over the past year continue to perform well for several

more months.

C) a company announces higher than expected sales and earnings. The stock price

immediately increases by 10%.

D) a company announces higher than expected sales and earnings. The stock price

remains unchanged.

Question Status: New question

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

4) Madison was hired to design and decorate the oices of a large pharmaceutical

company. She accidentally read a report indicating that a new drug had just been

approved by the Food and Drug administration. She immediately bought the company’s

stock which doubled in price over the following week. This outcome is inconsistent with

A) the weak-form eicient market hypothesis.

B) the semi-strong form eicient market hypothesis.

C) the strong form eicient market hypothesis. Her action was probably illegal.

D) all of the above.

Question Status: New question

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

5) Stock prices go up when there is positive information about a company, and go down

when there is negative information about the company.

Question Status: Previous edition

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

6) Strategies that exploit market ineiciencies tend to lose their efectiveness when they

become widely known.

Question Status: New question

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

7) If a market is weak form eicient, an investor can make higher than expected proits by

studying the past price patterns of a stock.

Question Status: Previous edition

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

8) If an individual with inside information can make higher than expected proits, the

market is no more than semi-strong form eicient.

Question Status: Previous edition

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

9) Under the eicient market hypothesis, would securities be properly priced.

Question Status: Previous edition

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information

10) Are markets moving toward being more eicient or toward being less eicient?

Question Status: Previous edition

Objective: 7.4 Explain the eicient market hypothesis and why it is important to stock prices.

Keywords: eicient markets

Principles: Principle 4: Market Prices Relect Information