公司理財-習題庫-Chap012-CAL-FENGHAI-(2020YEAR-YICAI)_JINGBIANCHAPTER12SomeLessonsfromCapitalMarketHistoryDEFINITIONSRISKPREMIUM1. Theexcessreturnrequiredfromariskyassetoverthatrequiredfromarisk-freeassetiscalledthe:riskpremium.geometricpremium.excessreturn.averagereturn.variance.VARIANCE2. Theaveragesquareddifferencebetweentheactualreturnandtheaveragereturniscalledthe:volatilityreturn.variance.standarddeviation.riskpremium.excessreturn.STANDARDDEVIATION3. Thestandarddeviationforasetofstockreturnscanbecalculatedasthe:positivesquarerootoftheaveragereturn.averagesquareddifferencebetweentheactualreturnandtheaveragereturn.positivesquarerootofthevariance.averagereturndividedbyNminusone,whereNisthenumberofreturns.variancesquared.NORMALDISTRIBUTION4. Asymmetric,bell-shapedfrequencydistributionthatiscompletelydefinedbyitsmeanandstandarddeviationisthe distribution.gammaPoissonbi-modalnormaluniformGEOMETRICAVERAGERETURNd 5. Theaveragecompoundreturnearnedperyearoveramulti-yearperiodiscalledthe averagereturn.arithmeticstandardvariantgeometricrealARITHMETICAVERAGERETURNa 6. Thereturnearnedinanaverageyearoveramulti-yearperiodiscalledthe averagereturn.arithmeticstandardvariantgeometricrealEFFICIENTCAPITALMARKETe 7. Anefficientcapitalmarketisoneinwhich:brokeragecommissionsarezero.taxesareirrelevant.securitiesalwaysofferapositiverateofreturntoinvestors.securitypricesareguaranteedbythe.SecuritiesandExchangeCommissiontobefair.securitypricesreflectavailableinformation.EFFICIENTMARKETSHYPOTHESIS8. Thenotionthatactualcapitalmarkets,suchastheNYSE,arefairlypricediscalledthe:EfficientMarketsHypothesis(EMH).LawofOnePrice.OpenMarketsTheorem.Laissez-FaireAxiom.MonopolyPricingTheorem.STRONGFORMEFFICIENCY9. Thehypothesisthatmarketpricesreflectallavailableinformationofeverykindiscalled formefficiency.openstrongsemi-strongweakstableSEMISTRONGFORMEFFICIENCY10. Thehypothesisthatmarketpricesreflectallpublicly-availableinformationiscalled formefficiency.openstrongsemi-strongweakstableWEAKFORMEFFICIENCY11. Thehypothesisthatmarketpricesreflectallhistoricalinformationiscalled formefficiency.openstrongsemi-strongweakstableTOTALRETURN2d 12. Thetotalpercentagereturnonanequityinvestmentiscomputedusingtheformula21 ,whereP1

isthepurchasecost,P

representsthesaleproceeds,anddisthedividendincome.12(P–P) 12

+d)2(P–P) 2

+d)11(P12(P22(P2

2 221P–d) P2111P+d) P1112P+d) P12DIVIDENDYIELD1a 13. Thedividendyieldisequalto ,where1

2isthepurchasecost,P2

representsthesaleproceeds,anddisthedividendincome.d P11d P12d P22d P21)2d (P+P1)2DIVIDENDYIELDc 14. TheZoloCo.justdeclaredthattheyareincreasingtheirannualdividendfrom$pershareto$pershare.Ifthestockpriceremainsconstant,then:thecapitalgainsyieldwilldecrease.thecapitalgainsyieldwillincrease.thedividendyieldwillincrease.thedividendyieldwillalsoremainconstant.neitherthecapitalgainsyieldnorthedividendyieldwillchange.CAPITALGAINb 15. Thedollaramountofthecapitalgainonaninvestmentiscomputedas ,whereP1P1P12P22P2

isthepurchasecost,P22P221PP1P1

representsthesaleproceeds,anddisthedividendincome.21P–P+d2112P–P–d12TOTALRETURNe 16. Thecapitalgainsyieldplusthedividendyieldonasecurityiscalledthe:varianceofreturns.geometricreturn.averageperiodreturn.summationofreturns.totalreturn.REALRETURNc 17. Therealrateofreturnonastockisapproximatelyequaltothenominalrateofreturn:multipliedby(1+inflationrate).plustheinflationrate.minustheinflationrate.dividedby(1+inflationrate).dividedby(1-inflationrate).REALRETURN18. Aslongastheinflationrateispositive,therealrateofreturnonasecurityinvestmentwillbe thenominalrateofreturn.greaterthanequaltolessthangreaterthanorequaltounrelatedtoHISTORICALRECORD19. Aportfoliooflargecompanystockswouldcontainwhichoneofthefollowingtypesofsecuritiesstockofthefirmswhichrepresentthesmallest20percentofthecompanieslistedontheNYSE.Treasurybillslong-termcorporatebondsstocksoffirmsincludedintheS&P500indexlong-termgovernmentbondsHISTORICALRECORDd 20. Basedontheperiodof1926through2003, havetendedtooutperformothersecuritiesoverthelong-term..Treasurybillslargecompanystockslong-termcorporatebondssmallcompanystockslong-termgovernmentbondsHISTORICALRECORDa 21. Whichoneofthefollowingtypesofsecuritieshastendedtoproducethelowestrealrateofreturnfortheperiod1926through2003.Treasurybillslong-termgovernmentbondssmallcompanystockslargecompanystockslong-termcorporatebondsHISTORICALRECORD22. Onaverage,fortheperiod1926through2003:therealrateofreturnon.Treasurybillshasbeennegative.smallcompanystockshaveunderperformedlargecompanystocks.long-termgovernmentbondshaveproducedhigherreturnsthanlong-termcorporatebonds.theriskpremiumonlong-termcorporatebondshasexceededtheriskpremiumonlong-termgovernmentbonds.theriskpremiumonlargecompanystockshasexceededtheriskpremiumonsmallcompanystocks.HISTORICALRECORD23. Overtheperiodof1926through2003,theannualrateofreturnon hasmorevolatilethantheannualrateofreturnon :largecompanystocks;smallcompanystocks.long-termgovernmentbonds;long-termcorporatebonds..Treasurybills;long-termgovernmentbonds.long-termcorporatebonds;smallcompanystocks.largecompanystocks;long-termcorporatebonds.HISTORICALRECORD24. Duringtheperiodof1926through2003theannualrateofinflation:wasalwayspositive.wasonlynegativeduringthe3yearsoftheGreatDepression.neverexceeded10percent.fluctuatedsignificantlyfromoneyeartothenext.tendedtobenegativeduringtheyearsofWorldWarII.HISTORICALRECORD25. Basedontheperiodof1926through2003theannualrateofinflationrangedfrom percentto a. -5;6b. -5;9c. -7;6d. -7;15e. -10;18HISTORICALRECORDb 26. $1investedin.Treasurybillsin1926wouldhaveincreasedinvalueto bya. $10b. $17c. $30d. $43e. $60HISTORICALRECORDd 27. Whichoneofthefollowingisacorrectrankingofsecuritiesbasedontheirvolatilityovertheperiodof1926to2003Rankfromhighesttolowest.largecompanystocks,.Treasurybills,long-termgovernmentbondssmallcompanystocks,long-termcorporatebonds,largecompanystockssmallcompanystocks,long-termgovernmentbonds,long-termcorporatebondslargecompanystocks,long-termcorporatebonds,long-termgovernmentbondslong-termgovernmentbonds,long-termcorporatebonds,.TreasurybillsHISTORICALRECORDd 28. $1investedinsmallcompanystocksin1926wouldhaveincreasedinvalueto by2003.a. $60b. $2,284c. $4,092d. $10,953e. $13,185HISTORICALRECORD29. Thehighestrateofannualinflationbetween1926and2003was percent.710131822HISTORICALRECORD30. Theannualreturnonlong-termgovernmentbondshasrangedbetween percentand percentduringtheperiod1926to2003.a. -2;8b. -4;6c. -5;10d. -6;29e. -7;44HISTORICALRECORDe 31. Overtheperiodof1926to2003,smallcompanystockshadanaveragereturnof percent.a.b.c.d.e.HISTORICALAVERAGERETURNSc 32. Overtheperiodof1926to2003,theaveragerateofinflationwas a.b.c.d.e.HISTORICALAVERAGERETURNSc 33. Theaverageannualreturnonlong-termcorporatebondsfortheperiodof1926to2003was percent.a.b.c.d.e.AVERAGERETURNSb 34. Theaverageannualreturnonsmallcompanystockswasabout percentgreaterthantheaverageannualreturnonlarge-companystocksovertheperiodof1926to2003.357911RISKPREMIUMa 35. Theaverageriskpremiumon.Treasurybillsovertheperiodof1926to2003was percent.a.b.c.d.e.RISKPREMIUMa 36. WhichoneofthefollowingisacorrectstatementconcerningriskpremiumThegreaterthevolatilityofreturns,thegreatertheriskpremium.Thelowerthevolatilityofreturns,thegreatertheriskpremium.Thelowertheaveragerateofreturn,thegreatertheriskpremium.Theriskpremiumisnotcorrelatedtotheaveragerateofreturn.Theriskpremiumisnotaffectedbythevolatilityofreturns.RISKPREMIUMc 37. Theriskpremiumiscomputedby theaveragereturnfortheinvestment.subtractingtheinflationratefromaddingtheinflationratetosubtractingtheaveragereturnonthe.Treasurybillfromaddingtheaveragereturnonthe.Treasurybilltosubtractingtheaveragereturnonlong-termgovernmentbondsfromRISKPREMIUMc 38. Theexcessreturnyouearnbymovingfromarelativelyrisk-freeinvestmenttoariskyinvestmentiscalledthe:geometricaveragereturn.inflationpremium.riskpremium.timepremium.arithmeticaveragereturn.RISKPREMIUMb 39. Toconvinceinvestorstoacceptgreatervolatilityintheannualrateofreturnonaninvestment,youmust:decreasetheriskpremium.increasetheriskpremium.decreasetheexpectedrateofreturn.decreasetherisk-freerateofreturn.increasetherisk-freerateofreturn.FREQUENCYDISTRIBUTIONa 40. WhichoneofthefollowingtakestheshapeofabellcurvefrequencydistributionvarianceriskpremiumgraphstandarddeviationdeviationofreturnsVARIANCEe 41. WhichofthefollowingstatementsarecorrectconcerningthevarianceoftheannualreturnsonaninvestmentThelargerthevariance,themoretheactualreturnstendtodifferfromtheaveragereturn.Thelargerthevariance,thelargerthestandarddeviation.Thelargerthevariance,thegreatertheriskoftheinvestment.Thelargerthevariance,thehighertheexpectedreturn.IandIIIonlyII,III,andIVonlyI,III,andIVonlyI,II,andIIIonlyI,II,III,andIVVARIANCE42. Thevarianceofreturnsiscomputedbydividingthesumofthe:squareddeviationsbythenumberofreturnsminusone.averagereturnsbythenumberofreturnsminusone.averagereturnsbythenumberofreturnsplusone.squareddeviationsbytheaveragerateofreturn.squareddeviationsbythenumberofreturnsplusone.STANDARDDEVIATION43. WhichofthefollowingstatementsconcerningthestandarddeviationarecorrectThegreaterthestandarddeviation,thelowertherisk.Thestandarddeviationisameasureofvolatility.Thehigherthestandarddeviation,thelesscertaintherateofreturninanyonegivenyear.Thehigherthestandarddeviation,thehighertheexpectedreturn.IandIIIonlyII,III,andIVonlyI,III,andIVonlyI,II,andIIIonlyI,II,III,andIVSTANDARDDEVIATION44. Thestandarddeviationonsmallcompanystocks:isgreaterthanthestandarddeviationonlargecompanystocks.islessthanthestandarddeviationonlargecompanystocks.hadanaveragevalueofabout33percentfortheperiod1926to2003.hadanaveragevalueofabout20percentfortheperiod1926to2003.IandIIIonlyIandIIonlyIIandIIIonlyIIandIVonlyIandIVonlyARITHMETICVS.GEOMETRICAVERAGES45. Estimatesusingthearithmeticaveragewillprobablytendto valuesoverthelong-termwhileestimatesusingthegeometricaveragewillprobablytendto valuesovertheshort-term.overestimate;overestimateoverestimate;underestimateunderestimate;overestimateunderestimate;underestimateaccurately;accuratelyMARKETEFFICIENCYd 46. Inanefficientmarket,thepriceofasecuritywill:alwaysriseimmediatelyuponthereleaseofnewinformationwithnofurtherpriceadjustmentsrelatedtothatinformation.reacttonewinformationoveratwo-dayperiodafterwhichtimenofurtherpriceadjustmentsrelatedtothatinformationwilloccur.risesharplywhennewinformationisfirstreleasedandthendeclinetoanewstablelevelbythefollowingday.reactimmediatelytonewinformationwithnofurtherpriceadjustmentsrelatedtothatinformation.beslowtoreactforthefirstfewhoursafternewinformationisreleasedallowingtimeforthatinformationtobereviewedandanalyzed.MARKETEFFICIENCY47. Ifthefinancialmarketsareefficient,theninvestorsshouldexpecttheirinvestmentsinthosemarketsto:earnextraordinaryreturnsonaroutinebasis.generallyhavepositivenetpresentvalues.generallyhavezeronetducearbitrageopportunitiesonaducenegativereturnsonaroutinebasis.MARKETEFFICIENCY48. WhichoneofthefollowingstatementsiscorrectconcerningmarketefficiencyRealassetmarketsaremoreefficientthanfinancialmarkets.Ifamarketisefficient,arbitrageopportunitiesshouldbecommon.Inanefficientmarket,somemarketparticipantswillhaveanadvantageoverothers.Afirmwillgenerallyreceiveafairpricewhenitsellssharesofstock.Newinformationwillgraduallybereflectedinastock’spricetoavoidanysuddenchangeinthepriceofthestock.MARKETEFFICIENCY49. Financialmarketsfluctuatedailybecausethey:areinefficient.slowlyreacttonewinformation.arecontinuallyreactingtonewinformation.offertremendousarbitrageopportunities.onlyreflecthistoricalinformation.MARKETEFFICIENCY50. Insidertradingdoesnotofferanyadvantagesifthefinancialmarketsare:weakformefficient.semiweak-formefficient.semistrong-formefficient.strong-formefficient.inefficient.MARKETEFFICIENCY51. Accordingtotheory,studyinghistoricalpricesinordertoidentifymispricedstockswillnotworkinmarketsthatare efficient.weak-formsemistrong-formstrong-formIonlyIIonlyIandIIonlyIIandIIIonlyI,II,andIIIMARKETEFFICIENCYe 52. WhichofthefollowingtendtoreinforcetheargumentthatthefinancialmarketsareefficientInformationspreadsrapidlyintoday’sworld.Thereistremendouscompetitioninthefinancialmarkets.Marketpricescontinuallyfluctuate.Marketpricesreactsuddenlytounexpectednewsannouncements.IandIIIonlyIIandIVonlyI,II,andIIIonlyII,III,andIVonlyI,II,III,andIVMARKETEFFICIENCYa 53. Ifyouexcelinanalyzingthefutureoutlookoffirms,youwouldpreferthatthefinancialmarketsbe formefficientsothatyoucanhaveanadvantageinthemarketplace.weaksemiweaksemistrongstrongperfectMARKETEFFICIENCYc 54. YourbestfriendworksinthefinanceofficeoftheDeltaCorporation.YouareawarethatthisfriendtradesDeltastockbasedoninformationheoverhearsintheoffice.Youknowthatthisinformationisnotknowntothegeneralpublic.YourfriendcontinuallybragstoyouabouttheprofitsheearnstradingDeltastock.Basedonthisinformation,youwouldtendtoarguethatthefinancialmarketsareatbest formefficient.weaksemiweaksemistrongstrongperfectMARKETEFFICIENCYc 55. TheU.S.SecuritiesandExchangeCommissionperiodicallychargesindividualsforinsidertradingandclaimsthoseindividualshavemadeunfairprofits.Basedonthisfact,youwouldtendtoarguethatthefinancialmarketsareatbest formefficient.weaksemiweaksemistrongstrongperfectMARKETEFFICIENCYb 56. Individualsthatcontinuallymonitorthefinancialmarketsseekingmispricedsecurities:tendtomakesubstantialprofitsonadailybasis.tendtomakethemarketsmoreefficient.areneverabletofindasecuritythatistemporarilymispriced.arealwaysquitesuccessfulusingonlywell-knownpublicinformationastheirbasisofevaluation.arealwaysquitesuccessfulusingonlyhistoricalpriceinformationastheirbasisofevaluation.PROBLEMSDOLLARRETURNSb 57. Oneyearago,youpurchasedastockatapriceof$.Thestockpaysquarterlydividendsof$.40pershare.Today,thestockisworth$pershare.Whatisthetotalamountofyourdividendincometodatefromthisinvestmenta. $.40$$$$DOLLARRETURNSd 58. Sixmonthsago,youpurchased100sharesofstockinABCCo.atapriceof$ashare.ABCstockpaysaquarterlydividendof$.10ashare.Today,yousoldallofyoursharesfor$pershare.Whatisthetotalamountofyourcapitalgainsonthisinvestment$$$$$DOLLARRETURNSd 59. Ayearago,youpurchased300sharesofIXCTechnologies,Inc.stockatapriceof$pershare.Thestockpaysanannualdividendof$.10pershare.Today,yousoldallofyoursharesfor$pershare.Whatisyourtotaldollarreturnonthisinvestmenta. $5,703b. $5,733c. $5,753d. $5,763e. $5,853DIVIDENDYIELDb 60. Youpurchased200sharesofstockatapriceof$pershare.Overthelastyear,youhavereceivedtotaldividendincomeof$322.WhatisthedividendyieldpercentpercentpercentpercentpercentDIVIDENDYIELDd61.Winslow,Inc.stockiscurrentlysellingfor$40ashare.Thestockhasadividendyieldofpercent.Howmuchdividendincomewillyoureceiveperyearifyoupurchase500sharesofthisstocka. $152b. $190c. $329d. $760e. $1,053DIVIDENDYIELDc 62. Oneyearago,youpurchasedastockatapriceof$32ashare.Today,yousoldthestockandrealizedatotalreturnof25percent.Yourcapitalgainwas$6ashare.WhatwasyourdividendyieldonthisstockpercentpercentpercentpercentpercentCAPITALGAIN63. Youjustsold200sharesofLangley,Inc.stockatapriceof$ashare.Lastyearyoupaid$asharetobuythisstock.Overthecourseoftheyear,youreceiveddividendstotaling$pershare.Whatisyourcapitalgainonthisinvestmenta. -$550b. -$222c. -$3d. $550e. $878CAPITALGAIN64.Youpurchased300sharesofDeltona,Inc.stockfor$ashare.Youhavereceivedatotalof$630individendsand$14,040inproceedsfromsellingtheshares.WhatisyourcapitalgainsyieldonthisstockpercentpercentpercentpercentpercentCAPITALGAINd 65. Today,yousold200sharesofSLG,Inc.stock..Yourtotalreturnonthesesharesispercent.Youpurchasedthesharesoneyearagoatapriceof$ashare.Youhavereceivedatotalof$280individendsoverthecourseoftheyear.WhatisyourcapitalgainsyieldonthisinvestmentpercentpercentpercentpercentpercentTOTALRETURNd 66. Sixmonthsago,youpurchased1,200sharesofABCstockfor$ashare.Youhavereceiveddividendpaymentsequalto$.60ashare.Today,yousoldallofyoursharesfor$ashare.Whatisyourtotaldollarreturnonthisinvestmenta. $720b. $1,200c. $1,440d. $1,920e. $3,840TOTALRETURNc 67. Eightmonthsago,youpurchased400sharesofWinston,Inc.stockatapriceof$ashare.Thecompanypaysquarterlydividendsof$.50ashare.Today,yousoldallofyoursharesfor$ashare.WhatisyourtotalpercentagereturnonthisinvestmentpercentpercentpercentpercentpercentREALRETURNb 68. Lastyear,youpurchasedastockatapriceof$ashare.Overthecourseoftheyear,youreceived$individendsandinflationaveragedpercent.Today,yousoldyoursharesfor$ashare.WhatisyourapproximaterealrateofreturnonthisinvestmentpercentpercentpercentpercentpercentREALRETURNe 69. Sevenmonthsago,youpurchasedastockatapriceof$ashare.Today,yousoldthosesharesfor$ashare.Duringthepastsevenmonths,youhavereceiveddividendstotaling$asharewhileinflationhasaveragedpercent.WhatisyourapproximaterealrateofreturnonthisinvestmentpercentpercentpercentpercentpercentSTANDARDDEVIATIONd 70. Astockhadreturnsof8percent,-2percent,4percent,and16percentoverthepastfouryears.WhatisthestandarddeviationofthisstockforthepastfouryearspercentpercentpercentpercentpercentRETURNDISTRIBUTIONSa 71.Astockhasanexpectedrateofreturnofpercentandastandarddeviationofpercent.Whichoneofthefollowingbestdescribestheprobabilitythatthisstockwilllose11percentormoreinanyonegivenyearlessthanpercentlessthanpercentlessthanpercentlessthanpercentlessthan5percentRETURNDISTRIBUTIONSd 72. Astockhasreturnsof3percent,18percent,-24percent,and16percentforthepastfouryears.Basedonthisinformation,whatisthe95percentprobabilityrangeforanyonegivenyeartopercenttopercenttopercenttopercenttopercentRETURNDISTRIBUTIONSc 73. Astockhadreturnsof8percent,14percent,and2percentforthepastthreeyears.Basedonthesereturns,whatistheprobabilitythatthisstockwillearnatleast20percentinanyonegivenyearpercentpercentpercentpercentpercentRETURNDISTRIBUTIONSc 74. Astockhadreturnsof11percent,1percent,9percent,15percent,and-6percentforthepastfiveyears.Basedonthesereturns,whatistheapproximateprobabilitythatthisstockwillearnatleast23percentinanyonegivenyearpercentpercentpercentpercentpercentRETURNDISTRIBUTIONSc 75. Astockhadreturnsof8percent,39percent,11percent,and-24percentforthepastfouryears.WhichoneofthefollowingbestdescribestheprobabilitythatthisstockwillNOTlosemorethan43percentinanyonegivenyearpercentpercentpercentpercentpercentRETURNDISTRIBUTIONSb 76. Overthepastfiveyears,astockproducedreturnsof14percent,22percent,-16percent,2percent,and10percent.WhatistheprobabilitythataninvestorinthisstockwillNOTlosemorethan8percentnorearnmorethan21percentinanyonegivenyear34percent68percent95percent99percent100percentARITHMETICAVERAGE77. Whatarethearithmeticandgeometricaveragereturnsforastockwithannualreturnsof4percent,9percent,-6percent,and18percentpercent;percentpercent;percentpercent;percentpercent;percentpercent;percentARITHMETICVS.GEOMETRICAVERAGES78. Whatarethearithmeticandgeometricaveragereturnsforastockwithannualreturnsof21percent,8percent,-32percent,41percent,and5percentpercent;percentpercent;percentpercent;percentpercent;percentpercent;percentGEOMETRICAVERAGEb 79. Astockhadreturnsof6percent,13percent,-11percent,and17percentoverthepastfouryears.WhatisthegeometricaveragereturnforthistimeperiodpercentpercentpercentpercentpercentGEOMETRICAVERAGEb 80. Astockhadthefollowingpricesanddividends.WhatisthegeometricaveragereturnonthisstockpercentpercentpercentpercentpercentESSAYS

Year Price 1 $2 $ $.233 $ $.244 $ $.25EFFICIENTMARKETSDefinethethreeformsofmarketefficiency.Thestudentshouldpresentastraightforwarddiscussionofweak(allpastpricesareinthecurrentprice),semi-strong(allpublicinformationisinthecurrentprice),andstrongform(allinformationisinthecurrentprice)marketefficiency.HISTORICALRETURNSWhatsecuritieshaveofferedthehighestaverageannualreturnsoverthelastseveraldecadesCanweconcludethatreturnandriskarerelatedinreallifeThepurposeofthisquestionistocheckstudentunderstandingofthecapitalmarkethistorydiscussionofthechapter,aswellastoreiteratetheconceptoftherisk-returntrade-off.The

securitiescategoriesdiscussedinthechapterarelistedbelowindescendingorderofhistoricalreturns(andrisk):smallcompanystockslargecompanystockslong-termcorporatebondslong-termgovernmentbonds.TreasurybillsBylearningthishierarchy,andgiventhattheyarefamiliarwiththeattributesofeachsecurity,studentsshouldbeleftwithlittledoubtthatthemaxim“Thegreatertherisk,thegreaterthereturn”isanaptdescriptionoffinancialmarkets.LESSONSWhatarethelessonslearnedfromcapitalmarkethistoryWhatevidenceistheretosuggesttheselessonsarecorrectFirst,thereisarewardforbearingrisk,andsecond,thegreatertherisk,thegreaterthereward.Asevidence,thestudentsshouldprovideabriefdiscussionofthehistoricalratesofreturnandstandarddeviationofreturnsofthevariousassetclassesdiscussedinthetext.EFFICIENTMARKETSExplainwhyitisthatinanefficientmarket,investmentshaveanexpectedNPVofzero.Inanefficientmarket,pricesare“fair”sothatthecostofaninvestmentisneithertoohighnortoolow.Thus,onaverage,investmentsinthatmarketwillyieldazeroNPV.Investorsgetexactlywhattheypayforwhentheybuyasecurityinanefficientmarketandfirmsgetexactlywhattheirstocksandbondsareworthwhentheysellthem.EFFICIENTMARKETSDoyouthinkthelessonsfromcapitalmarkethistorywillholdforeachyearinthefutureThatis,asanexample,ifyoubuysmallstockswillyourinvestmentalwaysoutperform.TreasurybondsThestudentshouldrealizethatweareworkingwithaverages,sotheyshouldnotexpectriskierassetstoalwaysoutperformlessriskyassets.Thestudentshouldexplainsomewhereintheiranswerthatthisgetstotheheartofwhatriskis.Thatis,thereasonyouexpecttoearnahigherreturnoverthelonghaulisthatyourvariabilityinpricefromyeartoyearcanbesignificant.RISKANDRETURNSupposeyouhave$30,000investedinthestockmarketandyourbankercomestoyouandtriestogetyoutomovethatmoneyintothebank’scertificates