Finance 301 - Exam 3 (Ch. 9, 12, 13) Questions with Correct Answers Latest Update
2025/2026
A stock has annual returns of 13 percent, 21 percent, -12 percent, 7 percent, and -6 percent for
the past five years. The arithmetic average of these returns is _____ percent while the geometric
average return for the period is _____ percent.
Answers:
3.89; 3.62
3.89; 4.60
3.62; 3.89
4.60; 3.62 - Answers 4.60; 3.89
Arithmetic average = (0.13 + 0.21- 0.12 + 0.07 - 0.06)/5 = 4.60 percent
Geometric return = (1.13 × 1.21 × 0.88 × 1.07 × 0.94).20 - 1 = 3.89 percent
Which one of the following statements concerning U.S. Treasury bills is correct for the period
1926- 2007?
Answers:
The annual rate of return always exceeded the annual inflation rate.
The average risk premium was 0.7 percent.
The annual rate of return was always positive.
The average excess return was 1.1 percent.
The average real rate of return was zero. - Answers The annual rate of return was always
positive.
A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent over the
past five years. What is the standard deviation of these returns?
,Answers:
18.74 percent
20.21 percent
20.68 percent
22.60 percent
23.49 percent - Answers 22.60 percent
Average return = (0.11 - 0.18 - 0.21 + 0.05 + 0.34)/5 = .022;
σ =√[1/(5 - 1)] [(0.11 - 0.022)2 + (-0.18 - 0.022)2 + (-0.21 -0.022)2 + (0.05 - 0.022)2 + (0.34 -
0.022)2] =
22.60 percent
To convince investors to accept greater volatility, you must:
Answers:
decrease the risk premium.
increase the risk premium.
decrease the real return.
decrease the risk-free rate.
increase the risk-free rate. - Answers increase the risk premium.
Individuals who continually monitor the financial markets seeking mispriced securities make the
markets increasingly more efficient.
Answers:
True
, False - Answers True
Efficient financial markets fluctuate continuously because:
Answers:
- the markets are continually reacting to old information as that information is absorbed.
- the markets are continually reacting to new information.
- arbitrage trading is limited.
- current trading systems require human intervention.
- investments produce varying levels of net present values - Answers the markets are continually
reacting to new information.
50-Cents tweets on HNHI are an example of a "pump-and-dump" price manipulation scheme.
Answers:
True
False - Answers True
According to theory, studying historical stock price movements to identify mispriced stocks:
Answers:
B. is effective provided the market is only weak form efficient.
E. is ineffective only in strong form efficient markets.
A. is effective as long as the market is only semistrong form efficient.
C. is ineffective even when the market is only weak form efficient.
D. becomes ineffective as soon as the market gains semistrong form efficiency. - Answers C. is
ineffective even when the market is only weak form efficient.
Small company stocks had the highest average return for the period 1926-2007.
2025/2026
A stock has annual returns of 13 percent, 21 percent, -12 percent, 7 percent, and -6 percent for
the past five years. The arithmetic average of these returns is _____ percent while the geometric
average return for the period is _____ percent.
Answers:
3.89; 3.62
3.89; 4.60
3.62; 3.89
4.60; 3.62 - Answers 4.60; 3.89
Arithmetic average = (0.13 + 0.21- 0.12 + 0.07 - 0.06)/5 = 4.60 percent
Geometric return = (1.13 × 1.21 × 0.88 × 1.07 × 0.94).20 - 1 = 3.89 percent
Which one of the following statements concerning U.S. Treasury bills is correct for the period
1926- 2007?
Answers:
The annual rate of return always exceeded the annual inflation rate.
The average risk premium was 0.7 percent.
The annual rate of return was always positive.
The average excess return was 1.1 percent.
The average real rate of return was zero. - Answers The annual rate of return was always
positive.
A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent over the
past five years. What is the standard deviation of these returns?
,Answers:
18.74 percent
20.21 percent
20.68 percent
22.60 percent
23.49 percent - Answers 22.60 percent
Average return = (0.11 - 0.18 - 0.21 + 0.05 + 0.34)/5 = .022;
σ =√[1/(5 - 1)] [(0.11 - 0.022)2 + (-0.18 - 0.022)2 + (-0.21 -0.022)2 + (0.05 - 0.022)2 + (0.34 -
0.022)2] =
22.60 percent
To convince investors to accept greater volatility, you must:
Answers:
decrease the risk premium.
increase the risk premium.
decrease the real return.
decrease the risk-free rate.
increase the risk-free rate. - Answers increase the risk premium.
Individuals who continually monitor the financial markets seeking mispriced securities make the
markets increasingly more efficient.
Answers:
True
, False - Answers True
Efficient financial markets fluctuate continuously because:
Answers:
- the markets are continually reacting to old information as that information is absorbed.
- the markets are continually reacting to new information.
- arbitrage trading is limited.
- current trading systems require human intervention.
- investments produce varying levels of net present values - Answers the markets are continually
reacting to new information.
50-Cents tweets on HNHI are an example of a "pump-and-dump" price manipulation scheme.
Answers:
True
False - Answers True
According to theory, studying historical stock price movements to identify mispriced stocks:
Answers:
B. is effective provided the market is only weak form efficient.
E. is ineffective only in strong form efficient markets.
A. is effective as long as the market is only semistrong form efficient.
C. is ineffective even when the market is only weak form efficient.
D. becomes ineffective as soon as the market gains semistrong form efficiency. - Answers C. is
ineffective even when the market is only weak form efficient.
Small company stocks had the highest average return for the period 1926-2007.
