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

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Question 21

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Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.

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Question 22

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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.

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If an investor holds earns 10% on her investment in the first year and loses 10% the next year,she will have neither a gain nor a loss.

Riskier investments have traditionally had lower returns than less risky investments have had.

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

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your rate of return?

The difference between returns on stocks and government bonds is known as

Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.

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

The expected rate of return is the weighted average of the possible returns for an investment.

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

You are considering investing in a firm that has the following possible outcomes: Economic boom: probability of 25%;return of 25% Economic growth: probability of 60%;return of 15% Economic decline: probability of 15%;return of -5% What is the expected rate of return on the investment?

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

During the financial crisis of 2007-2009,returns on real estate investment trusts (REITS)and stocks moved in opposite directions.

Arithmetic average rate of return takes compounding into effect.

Which of the following best measures an asset's risk?

Treasury Bills have less default risk than do Government Bonds.

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

The higher the standard deviation,the less risk the investment has.

You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 15% 16% State 2: Economic growth 45% 12% State 3: Economic decline 25% 5% State 4: Depression 15% -5% Calculate the expected rate of return for this investment.