1. Multiple-Choice Questions and Answers
Chapter 14
Multiple-Choice Questions and Answers

2. 1. Which of the following can never be negative?
(a) The real rate of interest
(b) The realized rate of return on a bond
(c) The holding period return on a stock
(d) The standard deviation on the rate of return on a stock
(e) The correlation coefficient between two stocks
The answer is (d).

3. 2. If the stock market is efficient, it implies _______.
one cannot outperform the market consistently
stocks are fairly valued at any point in time
the best investment strategy is to buy and hold
(a) and (b) only
(a), (b), and (c)
The answer is (e).

4. 3. The risk and return trade-off implies _______.
the higher the risk of an investment, the higher the expected return
the lower the default risk on a bond, the higher the holding period return
it is impossible to get rich in the stock market
that one must diversify to reduce risk
none of the above
The answer is (a).

5. The following information applies to questions 4 and 5.
Lisa Sadowska purchased 100 shares of AMB Inc. one year ago. She paid $11 per share and, at the time of purchase, she expected the company would pay a dividend of 50 cents per share and that the stock price would increase to $13 after one year. The actual dividend paid was 40 cents per share, and she just sold her stocks for $11.50 per share.

6. 4. The expected rate of return on the stock was _______.
8.18%
22.73%
18.18%
21.82%
4.55%
The answer is (b).

7. Why?

8. 5. The realized rate of return was _______.
(b) 3.48%
(c) 22.73%
(d) 20.87%
(e) 17.27%
The answer is (a).

9. Why?