Smartbook 12

If you buy 40 shares of BP stock at $25 per share, your total investment in BP is ___

$1,400

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

$200

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

$500 $50 - 2500 $40 - 2000

What will your capital gain be if you hold 40 shares of BP stock and the stock price rises from $27 to $40 a share?

$520 at $27 : 1080 at $40 : 1600

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

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

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

compare stock returns with the returns on other securities

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

- capital gains - dividends

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

0.0122 The mean return is 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)

Arrange the following investments in ascending order from the lowest historical risk premium at the top to the highest historical risk premium at the bottom

1. US Treasury Bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stocks

One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?

15% {($114 - $100)/$100} + (1)/$100 = 14% + 1%

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

8% (.19 + .13 - .08) / 3 = 8%

A capital gain on a stock results from ___

an increase in stock price

The total dollar return is the sum of dividends and ___

capital gains or losses

The two potential ways to make money as a stockholder are through ___ and capital appreciation

dividends

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

handsomely rewarded

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

high quality 20-year maturities

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

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

large-company stocks long-term US government bonds

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

Historically, the real return on Treasury bills has been:

quite low

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

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

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

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

very large

The efficient markets hypothesis contends that ___ capital markets such as the NASDAQ are efficient

well-organized

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% $2 / $100.= 2%

In an efficient market:

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

Studying market history can reward us by demonstrating that:

on average, investors will earn a reward for bearing risk the greater the potential reward is, the greater the risk

The year 2008 was:

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

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

risk-free

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

bell-shaped symmetrical

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

immediately

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

income

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

inflation taxes

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

7% (8% + 2% + 11%) / 3 = 7%

the probability of an outcome being within +- two standard deviations of the mean in a normal distribution is approximately ___ percent

95%

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

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

11.05% (((0.12-0.008)^2 + (0.1-0.08)^2 + (0.04-0.08)^2 + (0.22-0.08)^2) / (5-1))^0.5

The standard deviation is the ___ of the variance

square root

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 than stocks

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

Scott Corporation

Which of the following are true?

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

Based on the frequency distribution, rank the following ranges of stock returns in order from highest to lowest frequency: -10-0% 0-10% 10-20% 20-30%

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

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. US 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

All information - strong form efficiency All public information - semistrong form efficiency Historical stock prices - weak form efficiency

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

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

beginning stock price

Stock prices fluctuate from day to day because of:

information flow