Fundamentals of Corporate Finance, 12e (Ross)
Chapter 12 Some Lessons from Capital Market History
1) Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price.
She received a total of $1.15 per share in dividends. Which one of the following statements is
correct in relation to this investment?
A) The dividend yield is expressed as a percentage of the par value.
B) The capital gain would have been less had Stacy not received the dividends.
C) The total dollar return per share is $2.85.
D) The capital gains yield is positive.
E) The dividend yield is greater than the capital gains yield.
2) Which one of the following correctly describes the dividend yield?
A) Next year’s annual dividend divided by today’s stock price
B) This year’s annual dividend divided by today’s stock price
C) This year’s annual dividend divided by next year’s expected stock price
D) Next year’s annual dividend divided by this year’s annual dividend
E) The increase in next year’s dividend over this year’s dividend divided by this year’s dividend
3) Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to
$1.45 per share effective immediately. If the dividend yield remains at its pre-announcement
level, then you know the stock price:
A) was unaffected by the announcement.
B) increased proportionately with the dividend decrease.
C) decreased proportionately with the dividend decrease.
D) decreased by $.03 per share.
E) increased by $.03 per share.
4) Which one of the following statements related to capital gains is correct?
A) The capital gains yield includes only realized capital gains.
B) An increase in an unrealized capital gain will increase the capital gains yield.
C) The capital gains yield must be either positive or zero.
D) The capital gains yield is expressed as a percentage of a security’s total return.
E) The capital gains yield represents the total return earned by an investor.
5) Which of the following yields on a stock can be negative?
A) Dividend yield
B) Capital gains yield
C) Capital gains yield and total return
D) Dividend yield, capital gains yield, and total return
E) Dividend yield and total return
6) Small-company stocks, as the term is used in the textbook, are best defined as the:
A) 500 newest corporations in the U.S.
B) companies whose stock trades OTC.
C) smallest 20 percent of the companies listed on the NYSE.
D) smallest 25 percent of the companies listed on NASDAQ.
E) companies whose stock is listed on NASDAQ.
7) The historical record for the period 1926–2016 supports which one of the following
statements?
A) When large-company stocks have a negative return, they will have a negative return for at
least two consecutive years.
B) The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year.
C) There was only one year during the period when double-digit inflation occurred.
D) Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in
a single year.
E) The inflation rate was positive each year throughout the period.
8) Which one of the following time periods is associated with low rates of inflation?
A) 1941–1942
B) 1973–1974
C) 2014–2015
D) 1979–1980
E) 1946–1947
9) For the period 1926–2016, U.S. Treasury bills always:
A) provided an annual rate of return that exceeded the annual inflation rate.
B) had an annual rate of return in excess of 1.2 percent.
C) provided a positive annual rate of return.
D) earned a higher annual rate of return than long-term government bonds.
E) had a greater variation in returns year-over-year than did long-term government bonds.
10) Which one of the following statements is a correct reflection of the U.S. financial markets for
the period 1926–2016?
A) U.S. Treasury bill returns never exceeded a return of 9 percent in any one year.
B) U.S. Treasury bills had an annual return in excess of 10 percent in three or more years.
C) Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period.
D) Long-term government bonds outperformed U.S. Treasury bills every year during the period.
E) National deflation occurred in at least one year during every decade during the period.
11) For the period 2009–2016, U.S. Treasury bills had an annual rate of return that was:
A) between .5 and 1 percent.
B) between 1 and 2 percent.
C) negative in at least one year.
D) negative for two or more years.
E) between 0 and .25 percent.
12) Which one of the following categories of securities had the highest average annual return for
the period 1926–2016?
A) U.S. Treasury bills
B) Large-company stocks
C) Small-company stocks
D) Long-term corporate bonds
E) Long-term government bonds
13) Which one of the following categories of securities had the lowest average risk premium for
the period 1926–2016?
A) Long-term government bonds
B) Small-company stocks
C) Large-company stocks
D) Long-term corporate bonds
E) U.S. Treasury bills
14) The rate of return on which type of security is normally used as the risk-free rate of return?
A) Long-term Treasury bonds
B) Long-term corporate bonds
C) Treasury bills
D) Intermediate-term Treasury bonds
E) Intermediate-term corporate bonds
15) For the period 1926–2016, the average risk premium on large-company stocks was about:
A) 12.7 percent.
B) 10.4 percent.
C) 8.6 percent.
D) 6.9 percent.
E) 7.3 percent.
16) Assume that last year T-bills returned 2.8 percent while your investment in large-company
stocks earned an average of 7.6 percent. Which one of the following terms refers to the
difference between these two rates of return?
A) Risk premium
B) Geometric average return
C) Arithmetic average return
D) Standard deviation
E) Variance
17) Which one of the following statements correctly applies to the period 1926–2016?
A) Large-company stocks earned a higher average risk premium than did small-company stocks.
B) The average inflation rate exceeded the average return on U.S. Treasury bills.
C) Large-company stocks had an average annual return of 14.7 percent.
D) Inflation averaged 2.6 percent for the period.
E) Long-term corporate bonds outperformed long-term government bonds.
18) The excess return is computed as the:
A) return on a security minus the inflation rate.
B) return on a risky security minus the risk-free rate.
C) risk premium on a risky security minus the risk-free rate.
D) risk-free rate plus the inflation rate.
E) risk-free rate minus the inflation rate.
19) Which one of the following earned the highest risk premium over the period 1926–2016?
A) Long-term corporate bonds
B) U.S. Treasury bills
C) Small-company stocks
D) Large-company stocks
E) Long-term government bonds
20) What was the average rate of inflation over the period of 1926–2016?
A) Less than 2.0 percent
B) Between 2.0 and 2.4 percent
C) Between 2.4 and 2.8 percent
D) Between 2.8 and 3.2 percent
E) Greater than 3.2 percent
21) Assume you invest in a portfolio of long-term corporate bonds. Based on the period 1926–
2016, what average annual rate of return should you expect to earn?
A) Less than 5 percent
B) Between 5 and 6 percent
C) Between 6 and 7 percent
D) Between 7 and 8 percent
E) More than 8 percent
22) The average annual return on small-company stocks was about ________ percent greater
than the average annual return on large-company stocks over the period 1926–2016.
A) 3
B) 5
C) 7
D) 9
E) 11
23) Based on the period 1926-2016, the actual real return on large-company stocks has been
around:
A) 9 percent.
B) 10 percent.
C) 6 percent.
D) 7 percent.
E) 8 percent.
24) To convince investors to accept greater volatility, you must:
A) decrease the risk premium.
B) increase the risk premium.
C) decrease the real return.
D) decrease the risk-free rate.
E) increase the risk-free rate.
25) Which one of the following best defines the variance of an investment’s annual returns over a
number of years?
A) The average squared difference between the arithmetic and the geometric average annual
returns
B) The squared summation of the differences between the actual returns and the average
geometric return
C) The average difference between the annual returns and the average return for the period
D) The difference between the arithmetic average and the geometric average return for the period
E) The average squared difference between the actual returns and the arithmetic average return
26) Which one of the following categories of securities had the most volatile annual returns over
the period 1926–2016?
A) Long-term corporate bonds
B) Large-company stocks
C) Intermediate-term government bonds
D) U.S. Treasury bills
E) Small-company stocks
27) If the variability of the returns on large-company stocks were to decrease over the long-term,
you would expect which one of the following as related to large-company stocks to occur as a
result?
A) Increase in the risk premium
B) Increase in the average long-term rate of return
C) Decrease in the 68 percent probability range of returns
D) Increase in the standard deviation
E) Increase in the geometric average rate of return
28) Which one of the following statements is correct based on the historical record for the period
1926–2016?
A) The standard deviation of returns for small-company stocks was double that of large-
company stocks.
B) U.S. Treasury bills had a zero standard deviation of returns because they are considered to be
risk-free.
C) Long-term government bonds had a lower return but a higher standard deviation on average
than did long-term corporate bonds.
D) Inflation was less volatile than the returns on U.S. Treasury bills.
E) Long-term government bonds were less volatile than intermediate-term government bonds.
29) What is the probability that small-company stocks will produce an annual return that is more
than one standard deviation below the average?
A) 1.0 percent
B) 2.5 percent
C) 5.0 percent
D) 16 percent
E) 32 percent
30) Which one of the following is a correct ranking of securities based on the volatility of their
annual returns over the period of 1926–2016? Rank from highest to lowest.
A) Large-company stocks, U.S. Treasury bills, long-term government bonds
B) Small-company stocks, long-term corporate bonds, large-company stocks
C) Long-term government bonds, long-term corporate bonds, intermediate-term government
bonds
D) Large-company stocks, small-company stocks, long-term government bonds
E) Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills
31) Which one of the following had the least volatile annual returns over the period of 1926–
2016?
A) Large-company stocks
B) Inflation
C) Long-term corporate bonds
D) U.S. Treasury bills
E) Intermediate-term government bonds
32) Which one of the following statements is correct based on the period 1926–2016?
A) Long-term government bonds had more volatile annual returns than did the long-term
corporate bonds.
B) The standard deviation of the annual rate of inflation was less than 3 percent.
C) U.S Treasury bills have a zero variance in returns because they are risk-free.
D) The risk premium on small-company stocks was less than 10 percent.
E) The risk premium on all U.S. government securities is 0 percent.
33) Generally speaking, which of the following best correspond to a wide frequency distribution?
A) High standard deviation, low rate of return
B) Low rate of return, large risk premium
C) Small risk premium, high rate of return
D) Small risk premium, low standard deviation
E) High standard deviation, large risk premium
34) Standard deviation is a measure of which one of the following?
A) Average rate of return
B) Volatility
C) Probability
D) Risk premium
E) Real returns
35) Which one of the following is defined by its mean and its standard deviation?
A) Arithmetic nominal return
B) Geometric real return
C) Normal distribution
D) Variance
E) Risk premium
36) Which of the following statements are true based on the historical record for 1926–2016?
A) Risk-free securities produce a positive real rate of return each year.
B) Bonds are generally a safer, or less risky, investment than are stocks.
C) Risk and potential reward are inversely related.
D) The normal distribution curve for large-company stocks is narrower than the curve for small-
company stocks.
E) Returns are more predictable over the short term than they are over the long term.
37) Estimates of the rate of return on a security based on the 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.
A) overestimate; overestimate
B) overestimate; underestimate
C) underestimate; overestimate
D) underestimate; underestimate
E) accurately estimate; accurately estimate
38) 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.
39) The average compound return earned per year over a multiyear period is called the ________
average return.
A) arithmetic
B) standard
C) variant
D) geometric
E) real
40) The return earned in an average year over a multiyear period is called the ________ average
return.
A) arithmetic
B) standard
C) variant
D) geometric
E) real
41) Assume all stock prices fairly reflect all of the available information on those stocks. Which
one of the following terms best defines the stock market under these conditions?
A) Riskless market
B) Evenly distributed market
C) Zero volatility market
D) Blume’s market
E) Efficient capital market
42) Which one of the following statements best defines the efficient market hypothesis?
A) Efficient markets limit competition.
B) Security prices in efficient markets remain steady as new information becomes available.
C) Mispriced securities are common in efficient markets.
D) All securities in an efficient market are zero net present value investments.
E) All securities provide the same positive rate of return when the market is efficient.