Business Finance Ch 10

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

- Dividends - Capital gains

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

- bell-shaped - symmetrical

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

- lower; lower - greater; greater

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

False

Normally, the excess rate of return is ___.

positive

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

well-organized

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%

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

False

The arithmetic average rate of return measures the ____.

return in an average year over a given period

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

risk-free

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

19.8%

In an efficient market ______ investments have a _____ NPV.

all; zero

Stock prices fluctuate from day to day because of:

information flow

Average returns can be calculated:

two different ways

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

variance

Two ways of calculating average returns are _______ and _______.

- the geometric average - the arithmetic average

Studying market history can reward us by demonstrating that:

- there is a reward for bearing risk - the greater the potential reward is, the greater the risk

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%

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

2.5%

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

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

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

fair

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

information

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

- variance or standard deviation - mean

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

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

37%

The total dollar return is the sum of dividends and __________.

capital gains or losses

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

Geometric averages are usually ______ arithmetic averages.

smaller than

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

68

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

7.5%

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

False

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

is highly risky

Historically, the real return on Treasury bills has been:

quite low

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

The standard deviation is the ______ of the variance.

square root

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

False

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

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

cash

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

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

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

excess

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

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

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

mean

The year 2008 was:

one of the worst years for stock market investors in U.S. history

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

optimistic

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

pessimistic

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

False

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

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

small-company common stock