Chapter 10 notes

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

$2 x 100

A dividend yield of 10% says that, for each dollar we invest, we get

10 cents in div

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 to 2017 is:

19.8%

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

2.5%

Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ____ years.

20

In 2008, the S&P 500 plunged ___ %.

37%

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

68

From 1900 to 2010, the average stock market risk premium of the U.S. was ______.

7.2%

True or false: The dividend yield = Dt+1/Pt

T

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

Percentage returns are more convenient than dollar returns because they:

apply to any amount invested allow comparison against other investments

Two ways of calculating average returns are _______ and _______.

arithmetic and geometric

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

bonds

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

capital gain yield

The total return percentage is the

div yield + capital gains yield

True or false: The capital gains yield = (Pt+1 - Pt)/Dt

false

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

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

income

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

optimistic

Normally, the excess rate of return is ___.

positive

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

return

The variance and its square root the ___ ___are the most commonly used measures of volatility.

standard deviation

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

the arithmetic mean minus half of the variance

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

true

True or false: A capital loss is the same thing as a negative capital gain.

true

True or false: The risk premium can be interpreted as a reward for bearing risk

true

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

variance

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 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

2008 was a bad year for markets worldwide. One of the worst hit was the Icelandic Exchange where shares priced dropped _____ in one day.

76%

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 mean return The standard deviation of returns

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

bell shaped and smooth, symetrical

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

capital gains or losses

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____ price index is a commonly used measure of inflation.

consumer

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

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

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

risk-free

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:

small company common stock,large comp common stocck,long terp corp bonds, long term gov bonds, US treasury bills

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%

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

95

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

Variance or SD, mean

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

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

beginning stock price

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

dividends

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

false

True or false: From 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries.

false

True or false: In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of one year.

false

True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.

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

In 2008, the prices on long-term U.S. Treasury bonds

gained 40%

In 2008, the prices on long-term U.S. Treasury bonds __________ .

gained 40%

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

highly risky

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

Historically, the real return on Treasury bills has been:

low

The standard deviation is the ______ of the variance.

square root

In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of _______ month(s).

1

Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.

US Treasury bills, long term corp bonds, large company stocks, small company stocks

Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on

5 types of investments

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.

A positive capital gain on a stock results from ___.

increase in price

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

false