FINAN 450 Ch 10 practice

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

$2 x 100

The Ibbotson-Sinquefield data shows that:

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

The normal distribution is completely described by the _______ and ________.

-mean -variance or standard deviation

Arrange the following investments starting 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 stocks

The standard deviation for large-company stock returns from 1926 to 2017 is:

19.8%

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

cash

Geometric averages are usually ______ arithmetic averages.

smaller than

Which of the following are true based on the year-to-year returns from 1926-2014?

-Common stocks frequently experience negative returns-T-bills sometimes outperform common stocks

In an efficient market ______ investments have a _____ NPV.

all; zero

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

compound

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

greater; greater lower; lower

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

To get the average, or ____________ return, the yearly returns are summed and then divided by the number of returns.

mean

If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______.

optimistic

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

premium

Historically, the real return on Treasury bills has been:

quite low

True or false: The dividend yield = D↓t+1 / P↓t

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

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

-The standard deviation of returns -The mean return

Percentage returns are more convenient than dollar returns because they:

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

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

2.5%

The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately ___ percent.

68

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

A positive capital gain on a stock results from ___.

an increase in price

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

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

capital gains dividends

The total dollar return is the sum of dividends and __________.

capital gains or losses

The total return percentage is the _______ yield plus the capital gains yield.

dividends

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

information

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

is highly risky

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

larger

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

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

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 from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926-2014 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. US treasury bonds

A dividend yield of 10% says that, for each dollar we invest, we get ______ cents in dividends.

10

True or false: Arithmetic and geometric averages are useful because they are not influenced by volatility.

false [More volatility in returns produces a greater difference between the arithmetic and geometric averages.]

Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on __________ types of financial investments.

five

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

immediately

Some important characteristics of the normal distribution are that it is:

bell-shaped symetrical

The average return on the stock market can be used to ___.

compare stock returns with the returns on other securities

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

small-company common stock

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

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. all public information 3. historical stock prices

all information --> strong form efficiency all public information --> semi-strong form efficiency historical stock prices--> weak form efficiency

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

The geometric rate of return takes ______ into account.

compounding

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

income

If a study of past stock prices and volume to find mis-priced securities will not lead to gains in the market, then the market must be at least _____ efficient.

weak-form

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

well-organized

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

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

The arithmetic mean for large-company stock returns from 1926 to 2017 is:

12.1%

With a normal distribution, the probability that we end up withing two standard deviations is about _______________ percent.

95

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

True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks.

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 t's are down low

false =(P↓t+1 - P↓t ) / P↓t

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

pessimistic

An unrealized gain is treated the same as a realized gain when computing the total________.

return

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

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

the arithmetic mean minus half of the variance

Two ways of calculating average returns are _______ and _______.

the geometric average the arithmetic average

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

Average returns can be calculated:

two different ways

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

variance