Finance Chapter 10 Reading notes

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

$2 x 100

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

$2 x 100

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

- Dividends - Capital gains

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

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

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

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

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

- The standard deviation of return - The mean return

The normal distribution is completely described by the ____ and ____.

- Variance or standard deviation - Mean

Percentage returns are more convenient than dollar returns because they:

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

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

- bell-shaped - symmetrical

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

- greater; greater - lower; lower

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

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 show in Table 10.3:

1. Small-company common stock 2. Large-Company common stocks 3. Long-tem corporate bonds 4. Long-term government bonds 5. U.S. Treasury bills

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

12.1%

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

19.8%

The probability of an outcome being at least 2 standard deviation below the mean in a moral distribution is approx.

2.5%

The probability of a return being within (plus or minus) one standard deviation of the mean in a normal distribution is approximately _____ percent.

68%

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

7.5%

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

95

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

Beginning stock price

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

Capital gains or losses

The geometric rate of return takes _____ into account.

Compounding

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

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

Fair

T/F: Arithmetic and geomantic averages are useful because they are not influenced by volatility

False

T/F: Because T-Bills have low risk relative to common stocks, T-Bills cannot outperform common stocks.

False

T/F: The average return of a given period is typically not a good estimate of the returns over that same period.

False

T/F: The capital gains yield =(Pt+1 - Pt)/Dt

False

T/F: To get the average return, the yearly returns are summed and then multiplied by the number of returns.

False

T/F: percentage returns are difficult to use for comparison because they depend on the dollar amount invested.

False

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

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 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

Normally, the excess rate of return is ____.

Positive

If a study of a firm's financial information will not lead to gains in the market, then the market must be at least _____ efficient.

Semi-strong form

The standard deviation is the ____ of the variance.

Square root

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

Ten

Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in u.s. financial markets.

True

T/F: 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

T/F: A capital loss is the same thing as a negative capital gain.

True

T/F: The dividend yield = Dt+1/Pt

True

T/F: The risk premium can be interpreted as a reward for bearing risk

True

Average returns can be calculated:

Two different ways

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

Variance

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

If a study of a firm's financial information 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

In an efficient market ____ investments have a _____ NPV.

all; zero

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

an efficient maket reaction

A postive capital gain on a stock results from ____.

an increase in price

The percentage change in the price of a stock over a period of time is called its ____.

capital gain yield

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

cash

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

compare stock returns with the returns on other securities

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

compound

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

dividend

T/F: Because T-bills have lower risk relative to common stocks, T-bills cannot outperform common stocks.

false

T/F: Percentage returns are difficult to use for comparison because they depend on the dollar amount invested.

false

T/F: The geometric average rate of return measures the return in an average year over a given period.

false

T/F: The smaller the variance or standard deviation is, the more spread out the returns will be.

false

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

five

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

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

information

Stock price fluctuation 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 divide it by the:

initial stock price

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

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

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

optimistic

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

pessimistic

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

premium

Historically, the real return on Treasury bills has been:

quite low

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

return

The arithmetic average rate or 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

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

small-company common stock

The variance and its square root, the _____ _____, are the most commonly used measures of volatility.

standard deviation

T/F: The normal distribution is completely described by the average and standard deviation.

true

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

weak-form