The following 30 questions are worth 3 points each. Choose the single best response.
1. The excess return required on a risky asset over that earned on a risk-free asset is called (a):
A) Risk premium.
B) Return premium.
C) Excess return.
D) Average return.
E) Variance.
2. The hypothesis that market prices reflect all available, public and private, information is called
efficiency in the:
A) Open form.
B) Strong form.
C) Semi-strong form.
D) Weak form.
E) Stable form.
3. Over the past 76 years, which of the following investments has been the most risky?
A) Small company stocks
B) Common stocks
C) Treasury bills
D) Treasury bonds
E) Corporate bonds
4. You track the liquidity of companies and find that you can consistently earn unusually high returns by
purchasing the shares of firms whose stock price falls below the cash value per share as indicated on
the published balance sheet. Which of the following must be true?
A) This is not a violation of market efficiency.
B) This is not a violation of weak form efficiency.
C) This is a violation of the semi-circular form of efficiency.
D) This is a violation of semi-strong form efficiency.
E) This would be a violation of all forms of market efficiency.
5. You purchased 500 shares of preferred stock on January 1, 2002, for $95 per share. The stock pays an
annual dividend of $2 per share. On December 31, 2002, the market price is $94 per share. What is
your total dollar return for the year?
A) $ 1,000
B) $ 500
C) $ 3,500
D) $ 300
E) -$ 500
6. You purchased a bond on January 1, 2002, for $1,065. The bond has a $1,000 face value, a 10%
annual coupon, and can be sold for $975 on December 31, 2002. What is your percentage return on
investment for the year?
A) –4.1%
B) 0.9%
C) 9.4%
D) -8.4%
E) 12.5%
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