Chapter 12. SOME LESSONS FROM CAPITAL MARKET HISTORY

If you invested $100 and made a total dollar return of $10 over the course of the year, your year-end total cash would be

$110

The Ibbotson-Sinquefield data shows that:

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

If the risk premium of stock JKL is 5% while the standard deviation is 10%, then the Sharpe ratio equals?

.5

More volatility in returns produces __________ difference between the arithmetic and geometric averages

a larger

the average return on the stock market can be used to

compare stock returns with the returns on other securities

Stock prices fluctuate from day to day because of:

information flow

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 Shapre ratio measures ____.

reward to risk

Blume's formula combines

the arithmetic average return and the geometric average return.

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

$200

If you buy 100 shares of ABC stock at $5 per share, your total investment is _____?

$500

The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is _____.

$500(15x100) - (10x100) = 500

What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc. for $32?

$6,400

If your total dollar return was $7 and your dividend was $2, then the price change on your stock must have been ____

+$5

If you buy a stock for $10 and later sell it for $16, you will have a ___________.

Capital gain of $6

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.

1. all information=strong form efficiency 2. all public information=semistrong form efficiency 3. historical stock prices=weak from efficiency

Average returns can be calculated:

two different ways

the probability of an outcome being two standard deviations below the mean distribution is approximately ____ percent.

2.5

Dividend yield for a one-year period is equal to the annual dividend amount divided by the _____.

beginning stock price

The year 2008 was:

one of the worst years for stock market investors in US history

Look at the frequency distribution in Figure 12.9 and rank the following ranges of stock returns in order from highest to lowest frequency.

1. 10%-20% 2. 20%-30% 3. 0-10% 4. -10% to 0

Normally, the EXCESS RATE of Return is _________

Positive

What is the arithmetic average return for a stock that had annual returns of 8%, 2% and 11% for the past 3 years?

7 %

The total dollar return on a stock is the sum of the ___ and the ____.

dividends; capital gains

Palmer Company had the following returns: 2009: 12%2010: 10%2011: -8%2012: 4%2013: 22%What is the standard deviation of Palmer's return?

11.04%

Arrange the following investments from highest to lowest return based on what our study has revealed about risk premiums.

1. Small-company common stock 2. Long-term corporate bonds 3. U.S. Treasury bills

You buy a stock for $100, in one year its price rises to $114, and it pays a $1 dividend. You capital gains yield is ________.

14%

The probability of an outcome being within two standard deviations of the mean in a normal distribution is approximately ____ percent.

95

Mona Corporation has a variance of returns of 343, while Scott Company has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Corporation

In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics?

-High quality -20-year maturities

If the market changes and stock prices instantly and fully reflect new information, which time path does a change exhibit?

An efficient market reaction

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

is highly risky

When dealing with the history of capital market returns, an average stock market return is useful because it ______.

-simplifies detailed market data -is the best estimate of any one year's stock market return during the specified period.

A share of common stock currently sells for $100 and will pay a dividend of $2 at the end of the year. If the price is expected to increase to $113 at the end of one year, what is the stock's current dividend yield

2%

If stock ABC has a mean return of 10 percent with a standard deviation of 5 percent, then the probability of earning a negative is approximately __________percent.

2.5

If the annual stock market returns for Berry Company were 19 percent, 13 percent, and -8 percent, what was the arithmetic mean for those 3 years?

8%

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: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

True

if a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by ____.

[(1.10)(1.20)]^5-1

Percentage returns are more convenient than dollar returns because they:

apply to any amount invested

Historically, there is a(n) _____ relationship between risk and expected return in the stock market.

direct

An efficient market is one in which any change in available information will be reflected in the company's stock price ____.

immediately

In an efficient market:

-all investments have NPV=0 -assets are priced at the present value of their future cash flows

the ibbotson-sinquefield data presents returns from 1925 to the recent past for:

-Small cap stocks -Large cap stocks -US T-bills

Variance is measure in ______, while standard deviation is measured in _____.

percent squared, percent

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

variance

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 rates of return in the ibbotson-sinquefield studies are not adjusted for which of the following?

-Taxes -Inflation

If you are forecasting a few decades in the future you should calculate the expected return using:

Blume's formula

Which of the following is commonly used to measure inflation

The Consumer Price Index (CPI)

The Ibbotson-Sinquefield data presents rates of return from 1925 to recent times for:

-Long-term U.S. government bonds -Large-company stocks

You buy a stock for $50. Its price rises to $55, and it pays a $2 dividend in a year. You do not sell the stock. Your capital gains yield is _____.

10%

the standard deviation for large-company returns from 1926 to 2016 is

19.9%

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

capital gains and dividends

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 second lesson from studying capital market history is that risk is:

handsomely rewarded

Which of the following are true?

-Common stocks may experience negative returns. -T-bills sometimes outperform common stocks

If stock ABC has a mean return of 10 percent with a standard deviation of 5 percent, then the probability of earning a negative return is approximately ___ percent.

16

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

well-organized

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

-the mean return -the standard deviation of returns

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

7.5

Palmer Company had the following returns: 2009: 12%2010: 10%2011: -8%2012: 4%2013: 22%What is the variance of Palmer's returns?

0.0122

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

which of the following are true about the historical equity risk premiums of the countries studied by Dimson, Marsh, and Staunton?

-Denmark had the lowest equity risk premium -Italy had the highest equity risk premium

A distribution tends to have a smooth shape when the number of observations is _________.

very large

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

Geometric averages are ____ arithmetic averages.

smaller than