FIN: Ch 12 Some Lessons from Capital Market History
If you receive a $2 dividend per share on your 100 shares, your total dividend income is _____________.
$200
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 > semi-strong form efficiency - Historical stock prices > weak form efficiency
The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following?
-Inflation -Taxes
The Ibbotson-Sinquefield data shows that ___________.
-Long term corporate bonds had less risk or variability than stocks -US T-bills had the lowest risk or variability
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
Palmer Company had the following returns: 2009: 12% 2010: 10% 2011: -8% 2012: 4% 2013: 22% What is the variance of Palmer's returns?
0.0122
Look at the frequency distribution in Figure 12.9 and rank the following ranges of stock returns in order from highest to lowest frequency.
1. 20%-30% 2. 10%-20% 3. 0-10% 4. -10%-0
Arrange the following investments in ascending order from lowest historical risk premium to highest historical risk premium.
1. U.S. Treasury bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stock
You buy a stock for $50. Its price rises to $55, and it pays a $2 dividend in a year. You do NOT sell the stock. Your capital gains yield is ________.
10%
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the _____________.
Beginning stock price
If you are forecasting a few decades in the future you should calculate the expected return using:
Blume's formula
If you buy a stock for $10 and later sell it for $16, you will have a ___________.
Capital gain of $6
Historically, there is a(n) ________________ relationship between risk and expected return in the stock market.
Direct
The two potential ways to make money as a stockholder are through ____________ and capital appreciation.
Dividends
The total dollar return on a stock is the sum of the ____________ and the __________.
Dividends; Capital gains
The second lesson from studying capital market history is that risk is:
Handsomely rewarded
An efficient market is one in which any change in available information will be reflected in the company's stock price ____________.
Immediately
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 year 2008 was:
One of the worst years for stock market investors in US history
Normally, the excess rate of return is _____.
Positive
Historically, the real return on Treasury bills has been:
Quite low
Which of the following is commonly used to measure inflation
The Consumer Price Index (CPI)
The efficient markets hypothesis contends that _________ capital markets such as the NYSE are efficient.
Well-organized
When a company declares a dividend, shareholders generally receive _____________.
cash
Stock prices fluctuate from day to day because of:
information flow
The standard deviation is the _______ of the variance.
square root
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
What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc. for $32?
$6,400
Suppose you buy a share of stock for $100. At the end of one year the stock price is $144 and a $1 dividend is paid. If you do not sell the stock, your total annual return is _________.
15%
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+1)/100 = 15%
The probability of an outcome being within one standard deviation of the mean in a normal distribution is approximately _________ percent.
68
If the annual stock market returns for Berry Company were 19 percent, 13 percent, and -8 percent, what was the arithmetic mean for those 3 years?
8%
The arithmetic average rate of return measures the _______________.
Return in an average year over a given period
Mona Corporation has a variance of returns of 343, while Scott Company has a variance of returns of 898. Which company's actual returns vary more from their mean return?
Scott Company
You bought one share of stock for $100 and received a 2$ dividend. If the price of the stock rose to $103, then your total dollar return would be _____.
$5 103-100+2 = 5
If you buy 100 shares of ABC stock at $5 per share, your total investment is ____________.
$500
In an efficient market:
- All investments have NPV=0 - Assets are priced at the present value of their future cash flows
Some important characteristics of the normal distribution are that it is:
- Bell-shaped - Symmetrical
Which of the following are true?
- T-bills sometimes outperform common stocks. - Common stocks frequently experience negative returns.
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 -Long-term -U.S. treasury bills
The Ibbotson-Sinquefield data presents returns from 1925 to the recent past for:
-US T-Bills, -Large cap stocks -Small cap stocks
Palmer Company had the following returns: 2009: 12% 2010: 10% 2011: -8% 2012: 4% 2013: 22% What is the standard deviation of Palmer's return?
11.04%
If stock ABC has a mean return of 10 percent with a standard deviation of 5 percent, then the probability of earning a return greater than 15 percent is about _____ percent.
16
What is the arithmetic average return for a stock that has annual returns of 8%, 2%, and 11% for the past 3 years?
7%
The price of a stock drops from $50 to $40 per share. If you own 50 shares, your total capital loss is ___________.
$500 (2500-2000)
