FIN SB Ch 12

Based on average historical returns shown in the text, small-company stocks increased in value by _____ percent in a typical year.

16

Which one of the following best defines the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return

When a company declares a dividend, shareholders generally receive ______.

cash Reason: Most dividends are paid in cash.

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

high; low

Greater return volatility produces a (smaller/larger) difference between the arithmetic and geometric averages.

larger

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.

well-organized

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

True

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

fair

Stock prices fluctuate from day to day because of _____.

information flow

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 Sharpe ratio measures

reward to risk

A capital gain on a stock results from an increase in ______.

stock price

A projected IRR on a risky investment in the _____ percent range is not unusual.

10 to 20

In an efficient market:

all investments are zero NPV investments assets are priced at the present value of their future cash flows

Percentage returns are more convenient than dollar returns because they ____.

apply to any amount invested

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

income

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

information

When dealing with the history of capital market returns, an average stock market return is useful because it ___.

is the best estimate of any one year's stock market return during the specified period simplifies detailed market data

The Ibbotson-Sinquefield data presents returns from 1925 to the recent past for:

small cap stocks US T-bills large cap stocks

Geometric averages are ______ arithmetic averages.

smaller than

Average returns can be calculated _____.

two different ways

The Treasury bills used in the Ibbotson-Sinquefield studies had maturities of ___.

1 month

During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.

37

In 2008, long-term Treasuries in the United States gained Blank______ percent, while shorter-term Treasury bonds were up 13 percent.

40%

The probability of an outcome being within ± two standard deviations of the mean in a normal distribution is approximately ____ percent.

95

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

_______ were a bright spot for Australian investors during 2008.

Bonds

Which of the following are ways to make money by investing in stocks? (Select all that apply.)

Capital gains Dividends

The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following?

Inflation Taxes

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk Premium

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

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

True or false: A capital gain on a share is counted as part of the total return whether or not the gain is realised from selling the share.

True

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

True Reason: The larger the variance of standard deviation is, the more spread out the returns will be.

Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom. Instructions

US treasury bills long term corp bonds large company stocks Small company stocks

Standard deviation is a measure of which one of the following?

Volatility

More volatility in returns produces ______ difference between the arithmetic and geometric averages.

a larger

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

formula is the equation that combines the arithmetic average return and the geometric average return

blume's

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

If you buy a stock for $10 and later sell it for $16, you will have a ____.

capital gain of $6

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

capital gains or losses

The geometric rate of return takes ______ into account.

compounding

Historically, there is a(n) ______ relationship between risk and expected return in the stock market.

direct

The total dollar return on a stock is the sum of the ____ and the _____.

dividends; capital gains

Roger Ibbotson and Rex Sinquefield's research on historical rates of return:

does not adjust returns for inflation or taxes.

Which of the following is a conclusion that can be drawn regarding market efficiency from capital market history?

future market prices are hard to predict based on publicly available information

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

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 probability of an outcome being more than three standard deviations away from the mean in a normal distribution is approximately ___ percent.

less than 1

Variance is measured in ___, while standard deviation is measured in ___.

percent squared; percent

returns tell how much was received for each dollar invested, so they can be applied to any initial investment amount.

percentage

Normally, the excess rate of return on risky assets is ___.

positive

Historically, the real return on Treasury bills has been _____.

quite low

The second lesson from capital market history is that there is a direct link between and reward.

risk

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

risk-free

The ratio is calculated as the risk premium of the asset divided by the standard deviation.

sharpe

The Ibbotson-Sinquefield data show that over the long-term, ___.

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

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

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

variance

The dividend is defined as the annual dividend amount divided by the beginning stock price.

yield

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 corp bonds us treasury bills

Based on the historical returns shown in the text, the average was 2.9 percent per year over the 94-year span depicted.

inflation

The year 2008 was _____.

one of the worst years for stock market investors in U.S. history

Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient.

strong

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

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

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

symmetrical bell-shaped

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

A distribution tends to have a smooth shape when the number of observations is ___.

very large

Which one of the following statements is correct based on the period 1926-2016?

Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.

Match

Strong form efficiency matches Choice, It implies that all information of every kind is reflected in stock prices. It implies that all information of every kind is reflected in stock prices. Semistrong form efficiency matches Choice, It is the most controversial, and all public information is reflected in the stock price. It is the most controversial, and all public information is reflected in the stock price. Weak form efficiency matches Choice, It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices. It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices.

True or false: Based on capital market history, market efficiency shows us that it is relatively simple to identify stocks that are incorrectly priced.

False

Suppose you buy a share for $100. At the end of one year the share price is $114 and a $1 dividend is paid. If you do not sell the share, your total annual return is ____.

Reason: Even though the capital gain is not realised, it is still included in the annual return. ($114 - 100 + 1)/$100 = 15%

Which of the following are true?

T-bills sometimes outperform common stocks. Common stocks may experience negative returns.