FIN 311 ch12

The __________ the risk, the greater the required return.

greater

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

immediately

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

risk-free

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

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

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

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 2. strong form efficiency 3. historical stock prices

1. strong form efficiency 2. semistrong form efficiency 3. historical stock prices

A projected IRR on a risky investment in the _____ percent range is not unusual.

10 to 20

During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.

37

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

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

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 variance of return measures the squared difference in the returns from their mean.

Which of the following are true?

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

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

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

The standard deviation of returns The mean return

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

In an efficient market:

all investments are zero NPV investments assets are priced at the present value of their future cash flows

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

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

cash

The geometric rate of return takes ______ into account.

compounding

The ______ rate of return is the difference between risky returns and risk-free returns.

excess

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

fair

The second lesson from studying capital market history is that risk is _____.

handsomely rewarded

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

high; low

Dividends are the ______ component of the total return from investing in a stock.

income

The CPI is the most commonly used measure of _______.

inflation

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

information

Stock prices fluctuate from day to day because of _____.

information flow

Greater return volatility produces a _____________ difference between the arithmetic and geometric averages.

larger

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

larger

The year 2008 was _____.

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

Normally, the excess rate of return on risky assets is ___.

positive

The arithmetic average rate of return measures the ____.

return in an average year over a given period

The Sharpe ratio measures ___.

reward to risk

The second lesson from capital market history is that there is a direct link between _________ and reward.

risk

The __________ ratio is calculated as the risk premium of the asset divided by the standard deviation.

sharpe

The Ibbotson-Sinquefield data show that over the long-term, ___.

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

A normal distribution has a ______ shape.

symmetrical

The geometric average rate of return is approximately equal to ___.

the arithmetic mean minus half of 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 existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

true

Average returns can be calculated _____.

two different ways: arithmetic & geometric

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

variance

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