Q: If the average return on an investment is 12% and inflation is 3%, what is the real return using the exact formula?

$$\frac{1.12}{1.03} - 1 = 0.0874 \text{ or } 8.74\%$$

Q: What is the standard deviation of Supertech’s returns if the variance is 0.0892?

$$\sqrt{0.0892} = 0.2986 \text{ or } 29.86\%$$

Q: What is the formula for calculating the geometric average return for a series of returns $$R_1$$, $$R_2$$, ..., R_T$$ over n$ years?

$$\left[(1+R_1$) \times (1+R_2$) \times \ldots \times (1+R_T)\right]^{1/n} - 1$$

Question 1

An investor purchases 100 shares of a stock at $$37 per share. During the year, the stock pays a dividend of 1.85 $$per share and the price rises to $40.33 per share. What is the percentage return on this investment?

Accepted Answer

$$\frac{1.85 + (40.33 - 37)}{37} = 14\%$$

Question 2

Which investment type historically had the highest average return according to Ibbotson and Sinquefield’s studies?

Accepted Answer

Small-company stocks

Question 3

If the average return on U.S. Treasury bills is 3.4% and the average return on large-company stocks is 12.1%, what is the risk premium for large-company stocks?

Accepted Answer

$$12.1\% - 3.4\% = 8.7\%$$

Question 4

Which of the following best describes the probability that a stock with an expected return of 9.8% and a standard deviation of 15.4% will lose at least half its value in any one year?

Accepted Answer

Less than 0.5%

Question 5

What is the geometric average return for a $$1 investment that grows to 11$$,535.21 over 97 years?

Accepted Answer

$$\left(\frac{11,535.21}{1}\$$right)^{\frac{1}$${97}} - 1 = 0.101 	ext{ or } 10.1\%$$

Question 6

If an investment had returns of 10%, 12%, 3%, and -9% over four years, what is the variance of these returns?

Accepted Answer

$$\frac{0.027}{3} = 0.009$$

Question 7

Which investment is considered risk-free and is used as a benchmark for calculating risk premiums?

Accepted Answer

U.S. Treasury bills

Question 8

According to the Efficient Market Hypothesis (EMH), what is the expected NPV of investments in an efficient market?

Accepted Answer

Zero

Question 9

Which form of market efficiency asserts that all information, including inside information, is reflected in stock prices?

Accepted Answer

Strong form efficiency

Question 10

If the average return on an investment is 12% and inflation is 3%, what is the real return using the exact formula?

Accepted Answer

$$\frac{1.12}{1.03} - 1 = 0.0874 	ext{ or } 8.74\%$$

Question 11

Which behavioral finance principle explains why investors fear losses more than they celebrate gains?

Accepted Answer

Prospect Theory

Question 12

What is the standard deviation of Supertech’s returns if the variance is 0.0892?

Accepted Answer

$$\sqrt{0.0892} = 0.2986 	ext{ or } 29.86\%$$

Question 13

Which of the following is NOT a psychological bias discussed in behavioral finance?

Accepted Answer

Risk premium

Question 14

If a stock’s average return is 12.1% and its standard deviation is 19.8%, what is the probability that its return in a given year will be between -7.7% and 31.9%?

Accepted Answer

68%

Question 15

Which investment type has the highest standard deviation, indicating the greatest volatility?

Accepted Answer

Small-company stocks

Question 16

What is the formula for calculating the geometric average return for a series of returns $$R_1$$, $$R_2$$, ..., R_T$$ over n$ years?

Accepted Answer

$$\left[(1+R_1$) 	imes (1+R_2$) 	imes \ldots 	imes (1+R_T)ight]^{1/n} - 1$$

Question 17

Which scenario best illustrates the concept of 'framing' in behavioral finance?

Accepted Answer

An earnings report described as an improvement over the previous quarter is perceived more positively than the same report framed as a miss against expectations.

Question 18

What is the main implication of the Efficient Market Hypothesis for investors seeking positive NPV trading opportunities?

Accepted Answer

Investors must have a competitive advantage, such as special expertise or access to non-public information.

Question 19

Which of the following is a limit to arbitrage that can prevent market efficiency from being restored?

Accepted Answer

Firm-specific risk

Capital Markets History and Investment Returns: Study Notes for Financial Accounting Students

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