Chapter 12: Some Lessons from Capital Market History

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

$200

If you buy 100 shares of ABC stock at $5 per share, your total investment is _______.

$500

In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics: Government issuers, 20-year maturities, 10-year maturities, High quality

*20-year maturities *High quality

Which of the following are true?

*Common stocks may experience negative returns *T-bills sometimes outperform common stocks

Which of the following are true about the historical equity risk premiums of the countries studied by Dimson, Marsh, and Staunton?

*Denmark had the lowest equity risk premium *Italy had the highest equity risk premium

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

Studying market history can reward us by demonstrating that:

*on average, investors will earn a reward for bearing risk *the greater the potential reward is, the greater the risk

If the risk premium of stock JKL is 5% while the standard deviation is 10% , then the Sharpe ratio equals ______

.50

Look at the frequency distribution in figure 12.9 and rank the following ranges of stock returns in order from highest to lowest frequency: 10%-20%, 0-10%, 20%-30%, -10% to 0

1. 10%-20% 2. 20%-30% 3. 0-10% 4. -10% to 0

Arrange the following investments in ascending order from the lowest historical risk premium at the top to highest historical risk premium at the bottom: Large-company stocks, Small-company stocks, Long-term corporate bonds, US Treasury bonds

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

Palmer Company had the following returns: 2013: 12% 2014: 10% 2015: -8% 2016: 4% 2017: 22% What is the standard deviation of Palmer's returns?

11.04% (((0.12-0.08)^2+(0.1-0.8)^2+(-0.08-0.08)^2+(0.04-0.08)^2+(0.22-0.08)^2)/(5-1))^0.8 = 11.04%

A share of common stock currently sells for $100 and will pay a dividend of $2 at the end of the year. If the price is expected to increase to $113 at the end of one year, what's the stock's current dividend yield?

2% ($2/$100)

The probability of an outcome being two standard deviations below the mean in a normal distribution is approximately ______ percent

2.5

What is the arithmetic average return for a mutual fund that reported a return of 5% every year for the last 3 years?

5%

If the annual stock market returns for Berry Company were 19%, 13%, and -8%, what was the arithmetic mean for those 3 years?

8% (19+13+ -8 = 24/3 = 8

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

Beginning stock price

If you are forecasting a few decades in the future (like a retirement plan) you should calculate the expected return using:

Blume's formula

The average return on the stock market can be used to ______.

Compare stock returns with the returns on other securities

A commonly used tool to measure inflation?

Consumer Price Index (CPI)

Which one of the following are ways to make money by investing in stocks: dividends, amortization, capital gains, interest

Dividends and capital gains

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

Immediately

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

Average returns can be calculated:

Two different ways: geometric average or arithmetic average

The square of the standard deviation is equal to the _____

Variance

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

Very large

If a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by _________.

[(1.10)(1.20)]^5-1

A capital gain on a stock results from _____

an increase in stock price

If you buy a stock for $10 and later sell it for $16, you will have a _________

capital gain of $6

Variance is measured in ______, while standard deviation is measured in ______.

percent squared; percent

One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?

{($114-$100)/$100} + (1)/$100 = 14%+1% = 15%