Chapter 10 Questions

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 Stock 3) Long-term corporate bonds 4) Long-Term government bonds 5) U.S treasury bills

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

1. T-bills, which had the lowest risk, generated the lowest return 2. Small company stocks had the highest risk level 3. Small company stocks generated the highest average return

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%

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

19.8%

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

2.5%

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

capital gain yield

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

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

information

Stock prices fluctuate from day to day because of:

information flow

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

The standard deviation is the ______ of the variance.

square root

The variance and its square root, the ________ __________, are the most commonly used measures of volatility.

standard deviation

The square of the standard deviation is equal to the ____.

variance

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

$2 x 100

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%

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

Bonds

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

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 the returns on other securities

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

dividend

T/F: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks.

false

T/F: From 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries.

false

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

false

T/F: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.

false

T/F: The smaller the variance or standard deviation is, the more spread out the returns will be.

false

T/F: To get the average return, the yearly returns are summed and then multiplied by the number of returns.

false

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

five

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

gained 40%

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

handsomely rewarded

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

higher

In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of _______ month(s).

one

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

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

risk-free

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

Using capital market history as a guide, it would appear the greatest reward would come from investing in _______.

small-company common stock

T/F: A capital loss is the same thing as a negative capital gain.

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

The Ibbotson-Sinquefield data shows that:

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

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

- lower; lower - greater; greater

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

37%

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%

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

fair

T/F: The capital gains yield = (Pt+1 - Pt)/Dt

false

T/F: The dividend yield minus the capital gains yield is the total return percentage.

false

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

immediately

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

mean

T/F: The dividend yield = Dt+1/Pt

true

T/F: The normal distribution is completely described by the average and standard deviation.

true

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

- U.S. Treasury Bills - Long-term corporate bonds - large-company stocks - small company stocks

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 - all public information -> semi-strong form efficiency - historical stock prices -> weak form efficiency

Percentage returns are more convenient than dollar returns because they:

- apply to any amount invested - allow comparison against other investments

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

- bell-shaped - symmetrical

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

- capital gains - dividends

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

- the mean return - the standard deviation of returns

he average return on the stock market can be used to ___.

compare stock returns with the returns on other securities

T/F: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.

false

T/F: The average return of a given period is typically not a good estimate of the returns over that same period.

false

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

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

true

T/F: 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

T/F: The risk premium can be interpreted as a reward for bearing risk

true

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

- mean - variance (or standard deviation)

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

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

well-organized

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

20

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%

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

95

The ________ price index is a commonly used measure of inflation.

consumer

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

income

Normally, the excess rate of return is ___.

positive