FIN 505 CH 12

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

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

$200

The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately

(100%-95%)/2= 2.5%

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

+$5

IN an efficient Market:

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

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

- capital gains - dividends

Studying market history can reward us by demonstrating that:

-There is a reward for bearing risk -The greater the potential reward is, the greater the risk

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

0.0122 0.08= 0.12+0.10-0.08+0.04+0.22/5 the variance is (0.12-0.08)^2+(0.1)-0.08)^2)+(0.04-0.08)^2+(0.22-0.08)^2/ (5-1)= 0.0122

If the risk premium of stock JKL is 5 percent while the standard deviation is 10 percent, then the sharpe ratio equals________.

0.5

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%-0

Arrange the following investments in ascending order from lowest historical risk premium to highest historical risk premium.

1. U.S. Treasury bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stock

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

14%($114-100)/$100

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:

55-50/50=10%

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%

8%

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

Bond

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

Cash

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

Handsomely Rewarded

Your total Year-end value from a one-year investment equals the initial investment plus the total dollar return. It also equals the ____.

Proceeds from the stock sale plus dividends.

-Kate corporation has discovered a very secret new product, but hasn't yet announced the discover to the public. If the stock price reacts before the announcements (assuming no corporate "leaks"), the market is:

Strong form efficient

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

TRUE (without such professional traders, prices would fail to reflect all relevant information)

The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following?

Taxes Inflation

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

The square of the standard deviation is equal to the ___

Variance

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 efficiencyall public information > semi-strong form efficiencyhistorical stock prices > weak form efficiency

The average return on the stock market can be used to:

compare stock returns with the returns on other securities

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

immediately

Stock prices fluctuate from day to day because of:

information flow

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

is highly risky

The year 2008 was:

one of the worst years for stock market investors in US 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

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.

Average returns can be calculated:

two different ways: arithmetic & geometric

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

well-organized

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

$500

The price of a stock drops from $50 to $40 per share. If you own 50 shares, your total capital loss 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

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?

(0.12-0.-08)^2+(0.1-0.08)^2+(0.04-0.08)^2)/5-1^0.5= 11.04

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.

2.5

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

20 year maturities & high quality

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

Fair

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.

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

Italy had the highest equity risk premium, and Denmark had the lowest equity risk premium.

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

Large company stocks & long term US gov bonds.

-The Sharpe ratio measures _____.

Reward to Risk

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

Geometric averages are usually (blank) arithmetic averages

Smaller than

-Blume's formula combines

The arithmetic average return and the geometric average return.

Variable

The average square difference between the actual return and average return

standard deviation

The average square root of the variance

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

The mean Return The standard deviation return

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

The Ibbotson SBBI data shows that over the long-term

b. small-company stocks had the highest risk-level c. small-company stocks generated the highest average returnd/ d. t-bills, which had the lowest risk, generated the lowest return

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

beginning stock price

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

19.9%

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

Blume's formula

Historically, there is a(n) (blank) relationship between risk and expected return in the financial markets?

Direct

The geometric rate of return takes ________ into account.

compounding

Percentage returns are more convenient that dollar returns because they:

-apply to any amount invested -allow comparison against other investments

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 divided year?

2% $2/ $100

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

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

Very Large

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

a larger

Historically, the real return on Treasury bills has been:

quite low

The geometric average rate of return is approximately equal to:

the arithmetic mean minus half of the variance

The _____________ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return

Excess

Which of the following are true?

-common stocks frequently experience negative returns -T-Bills sometimes outperform common stocks

The total dollar return on a stock is the sum of:

-dividends -capital gains

-What is the arithmetic average return for a mutual fund that reported a return of 5% every year for the last 3 years?

5%`

The capital gain 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 Prices

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

an efficient market reaction

A capital gain on a stock results from_______.

an increase in stock price

The Ibbotson-Sinquefield data shows that _______.

variability than stocks & US T-bills had the lowest risk or variability. small company stocks generated the highest average return small company stocks had the highest risk level

Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926-2011 has revealed

1. Small-company common stock 2. Large-company common stocks 3. Long-term corporate bonds 4. Long-term government bondsU.S. Treasury bills