CH 12 SOME LESSONS FROM CAPITAL MARKET HISTORY
The geometric rate of return takes _________ into account.
Compounding
The __________ rate of return is the difference between risky returns and risk-free returns.
Excess
Average returns can be calculated _________.
Two different ways
Percentage returns are more convenient than dollar returns because they _________.
Apply to any amount invested
The average return on the stock market can be used to _________.
Compare stock returns with the returns on other securities.
The Sharpe ratio measures __________.
Reward to risk
Geometric averages are _________ arithmetic averages.
Smaller than
Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom.
1. U.S. Treasury Bills 2. Long-term corporate bonds 3. Large company stocks 4. Small company stocks
Suppose you buy a share of stock for $100. At the end of one year the stock price is $114 and a $1 dividend is paid. If you do not sell the stock, your total annual return is ________.
15%
Based on average historical returns shown in the text, small-company stocks increased in value by _________ percent in a typical year.
16
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ___________.
Beginning stock price
The ___________ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price.
Capital
When a company declares a dividend, shareholders generally receive __________.
Cash
Which of the following are ways to make money by investing in stocks?
Dividends and capital gains
One way to visually depict the dispersion of returns over a period of time is through a _________.
Frequency distribution
Historically, there is a(n) _________ relationship between risk and expected return in the stock market.
Direct
Average returns can be calculated using ___________ or arithmetic average.
Geometric
In terms of investments, the greater the potential risk, the __________ should be the expected return.
Greater
Which of the following are needed to describe the distribution of stock returns?
The standard deviation of returns The mean return
A capital gain on a stock results from an increase in ___________.
The stock price
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
If you buy a stock for $10 and later sell it for $16, you will have a _________.
Capital gain of $6
The total dollar return is the sum of dividends and ______________.
Capital gains or losses
Dividends are the _________ component of the total return from investing in a stock.
Income
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
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
Historically, the real return on Treasury bills has been _________.
Quite low
A normal distribution has a _________ shape.
Symmetrical
The dividend _________ is defined as the annual dividend amount divided by the beginning stock price.
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 and capital gains
The _________ the risk, the greater the required return.
Greater
Based on the historical returns shown in the text, the average __________ was 2.9 percent per year over the 94-year span depicted.
Inflation
Greater return volatility produces a ___________ difference between the arithmetic and geometric averages.
Larger
____________ returns tell how much was received for each dollar invested, so they can be applied to any initial investment amount.
Percent
Variance is measured in _________, while standard deviation is measured in ________.
Percent squared and percent
Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?
Scott Corporation
The __________ ratio is calculated as the risk premium of the asset divided by the standard deviation.
Sharpe
A capital gain on a stock results from an increase in __________.
Stock price