Chapter 10

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

$ 2 × 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 %

Arrange the following investments starting from the lowest historical risk premium and ending with the 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

A dividend yield of 10 percent 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 %

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

20

In 2008 , the S & P 500 plunged

37 %

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 %

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

95

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

Bonds

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

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

False

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

False

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

False

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

False

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 capital gains yield = ( Pt+1 - Pt ) / Dt

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

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 : An unrealized gain is treated the same as a realized gain when computing the total return .

True

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 dividend yield = Dt+1 / Pt

True

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

True

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

True

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

True

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

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

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

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 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 geometric average return is the average _____ return earned per year over a multiyear period .

compound

The geometric rate of return takes ____ into account .

compounding

The geometric rate of return takes ____ into account.

compounding

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

consumer

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

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

fair

Roger Ibbotson and Rex Sinquefield presented year - to - year historical rates of return on ____ 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

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

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

is highly risky

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

one

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

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

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

pessimistic

The risk ____ can be interpreted as the reward for bearing risk .

premium

Historically , the real return on Treasury bills has been

quite low

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

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

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

small-company common stock

Geometric averages are usually _____ arithmetic averages .

smaller than

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

Which of the following is commonly used to measure inflation ?

the consumer price index ( CPI )

Average returns can be calculated

two different ways

The square of the standard deviation is equal to the

variance

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

well - organized

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 Ibbotson SBBI data show that over the long - term ,

•T-bills, which had the lowest risk, generated the lowest return •small-company stocks generated the highest average return •small-company stocks had the highest risk level

The Ibbotson - Sinquefield data show that

•U.S. T-bills had the lowest risk or variability •long-term corporate bonds had less risk or variability than 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 -> semistrong 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 ?

•dividends •capital gains

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

•lower ; lower •greater ; greater

Two ways of calculating average returns are ______ and ______.

•the arithmetic average •the geometric average

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

•the mean return •the standard deviation of returns

The normal distribution is completely described by the ______ and ____.

•variance or standard deviation •mean