FIN 320 Ch 10

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:

1- Small- company common stock 2- Lg- Company common stock 3- Long- term corp. conds 4- long- term gov. bonds 5- US treasury bills

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

1-US treasury bill 2-Long-term Corp. Bond 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 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%

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 _____.

3.5-3.0=0.5%

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

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

7.5%-Reason: 0.10 - 0.05/2 = 0.075 or 7.5%

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%

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 info- strong form of efficiency all public information- semi-strong form efficiency historical stock prices- weak form efficiency

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

An efficient market reaction

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

Dividends Capital gains

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

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.

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: The dividend yield = Dt+1/Pt

True

In an efficient market ______ investments have a _____ NPV.

all; zero

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

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

fair

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 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 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 second lesson from studying capital market history states that the _______ the potential reward, the _______ the risk

lower; lower greater; greater

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

pessimistic

Historically, the real return on Treasury bills has been:

quite low

The arithmetic average rate of 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

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

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

small-company common stock

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.

smaller than

The standard deviation is the ______ of the variance.

square root

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

symmetrical bell-shaped

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

Average returns can be calculated:

two different ways

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

variance

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

variance or standard deviation mean

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

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

well-organized

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

False

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

False- yearly returns are summed and then divided by the number of returns.

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

False-The capital gains yield = (Pt+1 - Pt)/Pt

True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.

False-The larger the variance of standard deviation is, the more spread out the returns will be.

True or false: The geometric average rate of return measures the return in an average year over a given period.

False-Reason: The arithmetic average rate of return measures the return in an average year over a given period.