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**1. Which one of the following categories of securities had the ****highest**** average return for the period 1926–2013? **

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**A. Long-term government bonds **

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**B. Small-company stocks **

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**C. Long-term corporate bonds **

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**D. Large-company stocks**

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**2. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock? **

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**A. 92 percent **

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**B. 77 percent **

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** C. 71 percent **

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**D. 81 percent **

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**3. _______ market efficiency suggests that at a minimum, the current price of the stock reflects the stock’s own past prices. **

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**A. Weak form **

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**B. Strong form **

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**C. Semistrong**

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**D. Loose form **

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**4. Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $.15 a share. Today, you sold all of your shares for $40.10 per share. What’s the ****total**** amount of your dividend income on this investment? **

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**A. $15 **

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**B. $45 **

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**C. $50 **

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** D. $30 **

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**5. 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? **

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**A. Evenly distributed market **

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**B. Blume’s market **

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**C. Efficient capital market **

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**D. Zero volatility market**

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**6. Suppose that you purchased 300 shares of a stock at $36 per share, ignoring all commissions. Assume the stock paid a dividend of $2.15 per share for the year. The stock price rose to $41.05 per share and was then sold at that price. What was the dividends yield? (Round your answer to the nearest tenth of a percent.) **

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**A. 5.2 percent **

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** B. 6 percent **

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**C. 5 percent **

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**D. 6.5 percent **

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**7. Aimee is the owner of a stock with annual returns of 27 percent, –32 percent, 11 percent, and 23 percent for the last four years, respectively. She thinks the stock may be able to achieve a return of 50 percent or more in a single year. What’s the probability that your friend is correct? **

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**A. Greater than 1 percent but less than 2.5 percent **

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**B. Greater than 16 percent **

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**C. Greater than .5 percent but less than 1 percent **

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**D. Greater than 2.5 percent but less than 16 percent **

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**8. Eliminating unsystematic risk by holding a portfolio of different assets reflects **

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**A. the elimination of systematic risk. **

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**B. beta coefficiency. **

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** C. the principle of diversification. **

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**D. portfolio variance spreading. **

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**9. West Wind Tours stock is currently selling for $48 a share. The stock has a dividend yield of 3.2 percent. How much dividend income will you receive per year if you purchase 200 shares of this stock? **

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**A. $307.20 **

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**B. $362.00 **

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**C. $24.96 **

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**D. $36.20 **

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**10. Systematic risk is measured by the **

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**A. beta. **

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**B. arithmetic average. **

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**C. mean. **

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**D. geometric average. **

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**11. The market risk premium—the concept that investors should be rewarded for taking on extra risk—is illustrated as the **

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**A. slope of the SML. **

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**B. ****y****-access intersection of the SML. **

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**C. ****x****-access intersection of the SML. **

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**D. peak of the SML. **

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**12. One year ago, you purchased a stock at a price of $32.15. The stock pays quarterly dividends of $.20 per share. Today, the stock is selling for $33.09 per share. What’s your capital gain on this investment? **

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**A. $1.14 **

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**B. $.94 **

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**C. $1.04 **

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**D. $.74 **

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**13. With regard to the efficient markets hypothesis (EMH), which of the following answers illustrates market inefficiencies? **

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** A. Delayed reactions, overreactions, and corrections **

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**B. Insider trading, corruption, and government bailouts **

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**C. An immediate price fall after bad news is announced **

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**D. An immediate price jump after good news is announced **

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**14. The reward-to-risk ratio for stock ****A**** is less than the reward-to-risk ratio of stock ****B.**** Stock ****A**** has a beta of 0.82 and stock ****B**** has a beta of 1.29. This information implies that **

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**A. stock ****A**** is riskier than stock ****B,**** and both stocks are fairly priced. **

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** B. either stock ****A**** is overpriced, stock ****B**** is underpriced, or both. **

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**C. either stock ****A**** is underpriced, stock ****B**** is overpriced, or both. **

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**D. stock ****A**** is less risky than stock ****B,**** and both stocks are fairly priced. **

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**15. Suppose you estimate a boom will occur only 45 percent of the time and that the expected return on the portfolio in such an environment is 40 percent. You also estimate that a recession will occur 55 percent of the time and that the expected return in such an environment is 5 percent. What’s the expected return of the portfolio? **

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** A. 20.75 percent **

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**B. 5 percent **

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**C. 40 percent **

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**D. 22.5 percent **

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**16. How can the expected return of a portfolio be calculated? **

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**A. Take a weighted average by taking the expected return of each asset and multiplying by their proportion in the portfolio. Add the results. **

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**B. Square the expected returns before multiplying by the portfolio weights. Add each of the results, and then take the square root of the sum. **

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**C. If the portfolio has two assets, multiply the expected returns by 50 percent, and then add the results. If the portfolio has three assets, multiply the expected returns by 1/3, and so on. Then multiply the result. The proportions of each asset do ****not ****affect the answer. **

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**D. Expected return can be calculated only with Excel. **

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**17. How do you calculate risk premium? **

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**A. The risk-free rate minus the expected return **

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**B. Expected return plus the risk-free rate **

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**C. Expected return divided by the risk-free rate **

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**D. Expected return minus the risk-free rate**

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**18. The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What’s the expected market risk premium? **

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** A. 7.90 percent **

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**B. 7.02 percent **

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**C. 11.22 percent **

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**D. 10.63 percent **

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**19. The term “unsystematic risk” is synonymous with which of the following? **

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**A. Undiversifiable risk **

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**B. Systematic risk **

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**C. Beta risk **

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** D. Diversifiable risk **

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**20. The intercept point of the security market line is the rate of return that corresponds to **

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**A. a return of zero. **

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**B. the market rate. **

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**C. the risk-free rate. **

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**D. the market risk premium. **

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