Business Finance - ch. 10

If you receive a $2 dividend per share on your 100 shares, your total dividend income is ____

$2 x 100

Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.

1. U.S. Treasury Bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stocks

The standard deviation for large-company stock returns from 1926 to 2017 is:

19.8%

The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately ___ percent.

68

From 1900 to 2010, the average stock market risk premium of the U.S. was _

7.2%

True or false: In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of one year.

False; maturity of one month

True or false: From 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries.

False; several countries exceeded the U.S

Which of the following are true based on the year-to-year returns from 1926-2014?

T-bills sometimes outperform common stocks; common stocks frequently experience negative returns

_____ were a bright spot for U.S. investors during 2008.

bonds

True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.

False; larger variance is more spread out

What will the dividend income be on W number of shares of XYZ stock if XYZ distributes a $Y per share dividend?

W x $Y

In 2008, the S&P 500 plunged ___ %.

37

True or false: The capital gains yield = (Pt+1 - Pt)/Dt

False; (Pt+1 - Pt)/Pt

The percentage change in the price of a stock over a period of time is called its

capital gain yield

In 2008, the prices on long-term U.S. Treasury bonds

gained 40%

An efficient market is one that fully reflects all available _

information

If a study of a firm's financial information will not lead to gains in the market, then the market must be at least _____ efficient.

semi-strong form

Average returns can be calculated:

two different ways

Percentage returns are more convenient than dollar returns because they:

Apply to any amount invested; allow comparison against other investments

True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.

False; divided by

Which of the following are ways to make money by investing in stocks?

capital gains; dividends

The geometric average return is the average ____ return earned per year over a multiyear period.

compound

Stock prices fluctuate from day to day because of:

information flow

Which of the following is commonly used to measure inflation?

the consumer price index (cpi)

Treasury Bills yielded a nominal average return over 86 years of 3.5% versus an average inflation rate of 3.0% over the same period. This makes the real return on T-bills approximately equal to _____.

0.5%

A dividend yield of 10% says that, for each dollar we invest, we get ___ cents in dividends.

10

The arithmetic mean for large-company stock returns from 1926 to 2017 is:

12.1%

Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ____ years.

20

True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.

20

If the arithmetic average return is 10% and the variance of returns is 0.05, find the approximate geometric mean.

7.5%

2008 was a bad year for markets worldwide. One of the worst hit was the Icelandic Exchange where shares priced dropped _____ in one day.

76%

With a normal distribution, the probability that we end up withing two standard deviations is about _____ percent.

95

Match each information type to the form of market efficiency that identifies that type of information as being quickly and accurately reflected in stock prices.

All information: strong form efficiency Public information: semi-strong form efficiency Historical stock prices: weak form efficiency

True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks.

False; T-bills sometimes outperform common stocks

True or false: The geometric average rate of return measures the return in an average year over a given period.

False; arithmetic

More volatility in returns produces ______ difference between the arithmetic and geometric averages.

a larger

In an efficient market ______ investments have a _____ NPV.

all; zero

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

an efficient market reaction

A positive capital gain on a stock results from ___.

an increase in price

The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____

beginning stock price

The total dollar return is the sum of dividends and

capital gains or losses

When a company declares a dividend, shareholders generally receive

cash

The average return on the stock market can be used to __

compare stock returns with returns on other securities

The geometric rate of return takes ______ into account.

compounding

The total return percentage is the _____ yield plus the capital gains yield.

dividends

The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.

excess

True or false: The average return of a given period is typically not a good estimate of the returns over that same period.

false

True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.

false; they apply to any amount invested

Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on ____ types of financial investments.

five

The second lesson from studying capital market history states that the _______ the potential reward, the _______ the risk

greater, greater; lower, lower

The second lesson from studying capital market history is that risk is:

handsomely rewarded

An efficient market is one in which any change in available information will be reflected in the company's stock price _

immediately

Dividends are the ______ component of the total return from investing in a stock.

income

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the:

initial stock price

If the dispersion of returns on a particular security is very spread out from the security's mean return, the security _

is highly risky

Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?

overreaction and correction

If you use a geometric average to project short-run wealth levels, your results will most likely be

pessimistic

Normally, the excess rate of return is ___

positive

The risk ______ can be interpreted as the reward for bearing risk.

premium

Historically, the real return on Treasury bills has been:

quite low

An unrealized gain is treated the same as a realized gain when computing the total

return

The arithmetic average rate of return measures the _

return in an average year over a given period

The Ibbotson SBBI data show that over the long-term, __

small-company stocks generated the highest average return; T-bills, which had the lowest risk, generated the lowest return; small-company stocks had the highest risk level

Geometric averages are usually ______ arithmetic averages.

smaller than

The variance and its square root, the ______, are the most commonly used measures of volatility

standard deviation

The geometric average rate of return is approximately equal to __

the arithmetic mean minus half of the variance

Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets.

true

True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock

true

True or false: A capital loss is the same thing as a negative capital gain.

true

True or false: The dividend yield = Dt+1/Pt

true

The Ibbotson-Sinquefield data shows that:

U.S. T-bills had the lowest risk or variability; long-term corporate bonds had less risk or variability than stocks

The risk-return relationship states that a riskier investment should demand a ____________ return.

higher

The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____.

beginning stock price

To get the average, or _____ return, the yearly returns are summed and then divided by the number of returns.

mean

True or false: The normal distribution is completely described by the average and standard deviation.

true

If a study of past stock prices and volume to find mis-priced securities will not lead to gains in the market, then the market must be at least _____ efficient.

weak form

Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926-2014 has revealed as shown in Table 10.3:

1. Small-company common stock 2. Large-company common stocks 3. Long-term corporate bonds 4. Long-term government bonds 5. U.S. Treasury bills

The normal distribution is completely described by the _______ and ________.

mean; standard deviation or variance

If you use an arithmetic average to project long-run wealth levels, your results will most likely be _

optimistic

The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.

well-organized

The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:

2.5%

Some important characteristics of the normal distribution are that it is:

bell-shaped, symmetrical

The two potential ways to make money as a stockholder are through _______ and capital appreciation.

dividends

The total dollar return on a stock is the sum of the ____ and the _____.

dividends; capital gains

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

Which of the following are needed to describe the distribution of stock returns?

the mean return; the standard deviation of returns

The square of the standard deviation is equal to the

variance

Which of the following are needed to describe the distribution of stock returns?

The mean return; The standard deviation of returns