Ch. 12 FIN311 Connect

very large

A distribution tends to have a smooth shape when the number of observations is very ___.

information

An efficient market is one that fully reflects all available ______.

small company common stock long term corporate bonds US Treasury bills

Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums.

two different ways, geometric and arithmetic

Average returns can be calculated _____.

geometric

Average returns can be calculated using _____ or arithmetic average.

strong form efficiency

Choice It implies that all information of every kind is reflected in stock prices

Semistrong form efficiency

Choice It is the most controversial, and all public information is reflected in the stock price.

Weak form efficiency

Choice It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices.

income

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

37%

During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.

smaller than

Geometric averages are ______ arithmetic averages.

greater

The (greater/lower) the risk, the greater the required return.

reward to risk

The Sharpe ratio measures ___.

risk-free

The excess return on a risky asset is the difference between the risky return and the ____ rate.

True

True or False Common stocks may experience negative returns.

cash

When a company declares a dividend, shareholders generally receive ______.

acceptable, good, poor

a sharpe ratio of 1.0 is ____ a ratio of 2.0 is ___ a ratio of less than 1.0 is ____

Sharpe ratio

the ___ ratio is calculated as the risk premium of the asset divided by the standard deviation

larger

Greater return volatility produces a (smaller/larger) difference between the arithmetic and geometric averages.

true

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

high, low

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

bell-shaped, symmetrical

Some important characteristics of the normal distribution are that it is: 1. 2.

information flow

Stock prices fluctuate from day to day because of _____.

the arithmetic mean minus half of the variance

The geometric average rate of return is approximately equal to ___.

compounding

The geometric rate of return takes ______ into account.

risk

The second lesson from capital market history is that there is a direct link between ______ and reward.

handsomely rewarded

The second lesson from studying capital market history is that risk is _____. (risk and reward)

True

True or False T-bills sometimes outperform common stocks.

true

True or False The year 2008 was one of the worst years for stock market investors in U.S. history

the standard deviation of returns and the mean return

what is needed to describe the distribution of stock returns?

t-bills had the lowest risk or variability and long-term corporate bonds had less risk or variability

#2 The Ibbotson-Sinquefield data show that _____

an efficient market reaction

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

10 to 20

A projected IRR on a risky investment in the ___to __ percent range is not unusual.

fair

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

square root

the standard deviation is the ___ of the variance

strong because she did not announce it to the public

Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient.

earn a reward, greater the risk

Studying market history can reward us by demonstrating that: - on average, investors will ____ a ____ for bearing a risk - the greater potential reward is, the _____ the _____

dividend yield

The ____ _____ is defined as the annual dividend amount divided by the beginning stock price.

excess

The ______ rate of return is the difference between risky returns and risk-free returns.

beginning stock price

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______ price.

the consumer price index (CPI)

the ___ is commonly used to measure inflation

blumes formula

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:

efficient market:

In an ___ market, all investments are zero NPV investments assets are priced at the present value of their future cash flows

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

The Ibbotson-Sinquefield data show that over the long-term, ___. 1. 2. 3.

well-organized

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.