# chap012 - Chapter 012 Some Lessons from Capital Market...

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Chapter 012 Some Lessons from Capital Market History Multiple Choice Questions 1. The excess return required from a risky asset over that required from a risk-free asset is called the: A . risk premium. b. geometric premium. c. excess return. d. average return. e. variance. SECTION: 12.3 TOPIC: RISK PREMIUM TYPE: DEFINITIONS 2. The average squared difference between the actual return and the average return is called the: a. volatility return. B . variance. c. standard deviation. d. risk premium. e. excess return. SECTION: 12.4 TOPIC: VARIANCE TYPE: DEFINITIONS 3. What is a standard deviation? a. positive square root of an average rate of return b. average squared difference between the actual return and the average return C . positive square root of a variance d. average return divided by N minus one, where N is the number of returns e. the square of the variance SECTION: 12.4 TOPIC: STANDARD DEVIATION TYPE: DEFINITIONS 12-1

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Chapter 012 Some Lessons from Capital Market History 4. What is a normal distribution? a. a set of returns that lie within one standard deviation of an expected rate of return b. a set of variances computed over a period of time by comparing actual returns to the expected rate of return C . a symmetrical frequency distribution which is defined by its mean and standard deviation d. the square root of the average squared difference between an actual return and an expected return e. the frequency distribution of the average squared excess return over the risk-free rate SECTION: 12.4 TOPIC: NORMAL DISTRIBUTION TYPE: DEFINITIONS 5. The average compound return earned per year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant D . geometric e. real SECTION: 12.5 TOPIC: GEOMETRIC AVERAGE RETURN TYPE: DEFINITIONS 6. The return earned in an average year over a multi-year period is called the _____ average return. A . arithmetic b. standard c. variant d. geometric e. real SECTION: 12.5 TOPIC: ARITHMETIC AVERAGE RETURN TYPE: DEFINITIONS 12-2
Chapter 012 Some Lessons from Capital Market History 7. An efficient capital market defined as a market in which: a. trading is free for all participants. b. taxes are irrelevant. c. investors earn a zero profit. d. investors earn a profit on a security equal to the current yield. E . security prices reflect available information. SECTION: 12.6 TOPIC: EFFICIENT CAPITAL MARKET TYPE: DEFINITIONS 8. The notion that capital markets, such as the NYSE, price securities fairly based on available information is called the: A . efficient market hypothesis. b. zero profit hypothesis. c. open markets theorem. d. laissez-faire principle. e. pricing theorem. SECTION: 12.6 TOPIC: EFFICIENT MARKETS HYPOTHESIS TYPE: DEFINITIONS 9. Assume that P 1 is the purchase cost, P 2 represents the sale proceeds, and d represents dividend income. Given these definitions, which one of the following is the correct formula for the total return on an equity security? a. (P

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chap012 - Chapter 012 Some Lessons from Capital Market...

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