Chapter 12
During the financial crisis of 2008 , the S & P 500 Index fell by ___ percent .
37
The ____ ratio is calculated as the risk premium of the asset divided by the standard deviation .
Sharpe
More volatility in returns produces _____ difference between the arithmetic and geometric averages .
a larger
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
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
Which of the following is a conclusion that can be drawn regarding market efficiency from capital market history ?
future market prices are hard to predict based on publicly available information
The ____ the risk , the greater the required return .
greater
Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums .
1. Small - company common stock 2. Long - term corporate bonds 3. U.S. Treasury bills
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
Bonds used in Ibbotson - Sinquefield's long - term U.S. government bond portfolio had maturities of ___ years .
20
The probability of an outcome being within t two standard deviations of the mean in a normal distribution is approximately ___ percent .
95
_____ formula is the equation that combines the arithmetic average return and the geometric average return
Blume's
If you are forecasting a few decades in the future ( as you might do for retirement planning ) you should calculate the expected return using :
Blume's formula
The ____ ratio is calculated as the risk premium of the asset divided by the standard deviation ..
Sharpe
Which of the following is commonly used to measure inflation ?
The Consumer Price Index ( CPI )
True or false : The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient .
True
The second lesson from studying capital market history is that risk is
handsomely rewarded
In general , the arithmetic average return is probably too ____ for longer periods and the geometric average is probably too ____ for shorter periods .
high ; low
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
Based on the historical returns shown in the text , the average ____ was 2.9 percent per year over the 94 - year span depicted .
inflation
The CPI is the most commonly used measure of
inflation
The year 2008 was
one of the worst years for stock market investors in U.S. history
Variance is measured in _____, while standard deviation is measured in _____.
percent squared ; percent
The arithmetic average rate of return measures the
return in an average year over a given period .
The Sharpe ratio measures
reward to risk
Geometric averages are _____ arithmetic averages .
smaller than
Average returns can be calculated
two different ways
The efficient markets hypothesis contends that ______ capital markets such as the NASDAQ are efficient .
well - organized
The dividend ____ is defined as the annual dividend amount divided by the beginning stock price .
yield
The average return on the stock market can be used to
compare stock returns with the returns on other securities
In an efficient market , firms should expect to receive ____ value for securities they sell .
fair
Kate Corporation has discovered a very secret new product , but hasn't yet announced the discovery to the public . If the stock price reacts before the announcement ( assuming no corporate " leaks " ) , the market is ____ form efficient .
strong
Which of the following are ways to make money by investing in stocks ? ( Select all that apply . )
•Dividends •Capital gains
Match the forms of market efficiency with their descriptions .
•Strong Form Efficiency: It implies that all information of every kind is . reflected in stock prices . •Semi-Strong Form Efficiency: It is the most controversial , and all public information is reflected in the stock price . •Weak Form Efficiency: It suggests that , at a minimum , the current price of a stock reflects the stock's own past prices .
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
When a company declares a dividend , shareholders generally receive
cash
The two potential ways to make money as a stockholder are through ____ and capital appreciation .
dividends
Average returns can be calculated using _____ or arithmetic average .
geometric
An efficient market is one that fully reflects all available
information .
Greater return volatility produces a ____ difference between the arithmetic and geometric averages .
larger
The probability of an outcome being more than three standard deviations away from the mean in a normal distribution is approximately ______ percent .
less than 1
The second lesson from capital market history is that there is a direct link between ____ and reward .
risk
The excess return on a risky asset is the difference between the risky return and the ____ rate .
risk - free
The standard deviation is the _____ of the variance .
square root
A capital gain on a stock results from an increase in
stock price
A normal distribution has a _____ shape .
symmetrical
In the Ibbotson - Sinquefield study , the U.S. small - company common stock portfolio corresponds to the bottom fifth , in terms of market value , of stocks traded on
the New York Stock Exchange
Blume's formula combines
the arithmetic average return and the geometric average return
A projected IRR on a risky investment in the ______ percent range is not unusual .
10 to 20
Based on average historical returns shown in the text , small - company stocks increased in value by ___ percent in a typical year .
16
True or false : Based on capital market history , market efficiency shows us that it is relatively simple to identify stocks that are incorrectly priced .
False
A distribution tends to have a smooth shape when the number of observations is
very large
Stock prices fluctuate from day to day because of
information flow
The total dollar return on a stock is the sum of the ____ and the ____.
dividends ; capital gains
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
Which of the following are true ?
•T - bills sometimes outperform common stocks •Common stocks may experience negative returns
In an efficient market :
•assets are priced at the present value of their future cash flows •all investments are zero NPV investments
When dealing with the history of capital market returns , an average stock market return is useful because it_______
•is the best estimate of any one year's stock market return during the specified period •simplifies detailed market data
Studying market history can reward us by demonstrating that
•the greater the potential reward is , the greater the risk •on average , investors will earn a reward for bearing risk
The Ibbotson - Sinquefield data show that over the long - term ,
•T - bills , which had the lowest risk , generated the lowest return •small - company stocks had the highest risk level •small - company stocks generated the highest average return
The dividend yield for a 1 - year period is equal to the annual dividend amount divided by the
beginning stock price