FIN 305: Chapter 10

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

2.5%

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

False: T-bills sometimes outperform common stocks

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

optimistic

The standard deviation is the ______ of the variance.

square root

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 starting from lowest historical risk premium to highest historical risk premium.

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

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

68

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

Capital gains Dividends

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.

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

Mean

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

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

True

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

True

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

True

In an efficient market ______ investments have a _____ NPV.

all; zero

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

bell-shaped symmetrical

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

dividends

The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.

excess

The risk-return relationship states that a riskier investment should demand a ____________ return.

higher

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

immediately

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

information

Stock prices fluctuate from day to day because of:

information flow

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

is highly risky

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

mean variance or standard deviation

The arithmetic average rate of return measures the ____.

return in an average year over a given period

Two ways of calculating average returns are _______ and _______.

the arithmetic average the geometric average

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

the arithmetic mean minus half of the variance

Studying market history can reward us by demonstrating that:

the greater the potential reward is, the greater the risk there is a reward for bearing risk

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

variance

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

well-organized

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

pessimistic

Normally, the excess rate of return is ___.

positive

Historically, the real return on Treasury bills has been:

quite low

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

Multiple Select QuestionYour Answer incorrect ErrorBefore moving on, you must review a resource for this question. The Ibbotson SBBI data show that over the long-term, ___.

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

Geometric averages are usually ______ arithmetic averages. Multiple choice question.

smaller than

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