Managerial Finance Ch.10

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

$2 × 100

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

-The mean return -The standard deviation of returns

A dividend yield of 10 percent says that, for each dollar we invest, we get ______ cents in dividends

10

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

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

Dividends

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

False

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

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 efficient markets hypothesis contends that ______ capital markets such as the NYSE are efficient

Well-organized

Percentage returns are more convenient than dollar returns because they _____

-Allow comparison against other investments -Apply to any amount invested

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

The standard deviation for large-company stock returns from 1926 to 2021 is ______

19.7%

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

20

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

5

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 United States was _______

7.2%

If the arithmetic average return is 10% and the variance of returns is .05, find the approximate geometric mean

7.5% Reason: 0.10 - 0.05/2 = 0.075 or 7.5%

The geometric average return is the average _______ (compound/simple) return earned per year over a multiyear period

Compound

The geometric rate of return takes _____ into account

Compounding

The _____ price index is a commonly used measure of inflation

Consumer

Historically, there is a(n) ______ relationship between risk and expected return in the financial markets

Direct

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

Dividend

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

Fair

True or false: Arithmetic and geometric averages are useful because they are not influenced by volatility

False

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

False

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

False

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

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

False

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

False

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

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

Historically, the real return on Treasury bills has been ______

Quite low

All information

Strong form efficiency

Which of the following is commonly used to measure inflation?

The consumer price index (CPI)

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

True

Average returns can be calculated _______

Two different ways

The square of the standard deviation is equal to the ______

Variance

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

W × $Y

Historical stock prices

Weak form efficiency

The risk _____ can be interpreted as the reward for bearing risk

Premium

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

Higher

True or false: The dividend yield minus the capital gains yield is the total return percentage

False

With a normal distribution, the probability that we end up within two standard deviations is about ___ %

95

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

Pessimistic

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

Which of the following are true based on the year-to-year returns from 1926 to 2021?

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

Two ways of calculating average returns are _____ and ______

-The geometric average -The arithmetic average

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

One

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

Optimistic

Geometric averages are usually _______ arithmetic averages

Smaller than Reason: Geometric averages are usually smaller than arithmetic averages because of the effect of compounding

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

-Greater; greater -Lower; lower

The Ibbotson-Sinquefield data show that ______

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

The normal distribution is completely described by the ______ and _______

-Mean -Variance or standard deviation

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

-Symmetrical -Bell-shaped

Studying market history can reward us by demonstrating that ________

-The greater the potential reward is, the greater the risk -There is a reward for bearing risk

Treasury bills yielded a nominal average return over 95 years of 3.3% versus an average inflation rate of 2.9% over the same period. This makes the real return on Treasury bills approximately equal to _____

.4%

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

Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926 to 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 arithmetic mean for large-company stock returns from 1926 to 2021 is _________

12.2%

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

2.5%

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%

A positive capital gain on a stock results from _____

An increase in price

To compute the _______ return, the yearly returns are summed and then divided by the number of returns

Average

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

Bonds

The total dollar return is the sum of dividends and ______

Capital gains or losses

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

False

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

Handsomely rewarded

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

Is highly risky

Normally, the excess rate of return is _____

Positive

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

Semistrong form

All public information

Semistrong form efficiency

True or false: 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: The risk premium can be interpreted as a reward for bearing risk

True

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

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 dollar return on a stock is the sum of the ______ and the ______

Dividends; Capital gains

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

False

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

False Reason: The arithmetic average rate of return measures the return in an average year over a given period

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

False Reason: The capital gains yield = (Pt+1 - Pt)/Pt

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

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

Small-company common stock

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