Chapter 12 Some Lesson from Capital Market
A projected IRR on a risky investment in the _____ percent range is not unusual.
10 to 20
normal distribution
A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation
Which of the following are ways to make money by investing in stocks? (Select all that apply.)
Capital gains; Dividends
Blume's Formula
R(T) = (T-1)/(N-1) x Geometric Average + (N-T)/(N-1) x Arithmetic Average
In the Ibbotson study, the large-company common stock portfolio is based on the ____.
S&P 500 Index
Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?
Scott Corporation
The ___ ratio is calculated as the risk premium of the asset divided by the standard deviation.
Sharpe
Which of the following are true?
T-bills sometimes outperform common stocks; Common stocks may experience negative returns.
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
Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom.
US Treasury Bills Long term corporate bonds large company stocks small company stocks
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.
beginning stock price
The ___ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price.
capital
The two potential ways to make money as a stockholder are through ______ and capital appreciation.
dividends
Average returns can be calculated using ___ or arithmetic average.
geometric
The ___ the risk, the greater the required return.
greater
The second lesson from studying capital market history is that risk is _____.
handsomely rewarded
In general, the arithmetic average return is probably too _____ for longer periods and the geometric average is probably too _____ for shorter periods.
high; low
Dividends are the ______ component of the total return from investing in a stock.
income
The CPI is the most commonly used measure of ___.
inflation
Greater return volatility produces a (smaller/larger) difference between the arithmetic and geometric averages.
larger
The year 2008 was _____.
one of the worst years for stock market investors in U.S. history
income component
receiving cash payments from an asset.
The Sharpe ratio measures ___.
reward to risk
The second lesson from capital market history is that there is a direct link between ___ and reward.
risk
Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums.
small company common stock long term corporate bonds US treasury bills
Geometric averages are ______ arithmetic averages.
smaller than
The standard deviation is the ______ of the variance.
square root
A normal distribution has a ______ shape.
symmetrical
In the Ibbotson-Sinquefield study, the U.S. small-company common stock portfolio corresponds to the bottom fifth, in terms of market value, of stocks traded on ____.
the New York Stock Exchange
geometric average return
the average compound return earned per year over a multiyear period
risk premium
the excess return required from an investment in a risky asset over that required from a risk-free investment
The square of the standard deviation is equal to the ____.
variance
A distribution tends to have a smooth shape when the number of observations is ___.
very large
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
___ formula is the equation that combines the arithmetic average return and the geometric average return
Blume
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
arithmetic average return
The return earned in an average year over a multiyear period
More volatility in returns produces ______ difference between the arithmetic and geometric averages.
a larger
When a company declares a dividend, shareholders generally receive ______.
cash
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 arithmetic average rate of return measures the ____.
return in an average year over a given period
The Ibbotson-Sinquefield 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
A capital gain on a stock results from an increase in ______.
stock price
Studying market history can reward us by demonstrating that _____.
the greater the potential reward is, the greater the risk; on average, investors will earn a reward for bearing risk
return on your investment
the return to you at some future date of the amount you had invested or loaned
Average returns can be calculated _____.
two different ways
The dividend ___ is defined as the annual dividend amount divided by the beginning stock price.
yield
If you buy a stock for $10 and later sell it for $16, you will have a ____.
capital gain of $6
The excess return on a risky asset is the difference between the risky return and the ____ rate.
risk-free
During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.
37