FINA 3310 - ch10

If you receive a $2 dividend per share on your 100 shares, your total dividend income is ____.

$2 x 100

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

The Ibbotson-Sinquefield data shows that:

U.S. T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks

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

U.S. Treasury Bills Long-term government then corporate bonds Large-company stocks Small-company stocks

To compute the _______ return, the yearly returns are summed and then divided by the number of returns.

average

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

beginning stock price

_______ were a bright spot for U.S. investors during 2008.

bonds

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

capital gains or losses

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

capital gains, dividends

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

cash

The geometric rate of return takes ______ into account.

compounding

The geometric average return is the average ______ return earned per year over a multiyear period.

compund

Which of the following is commonly used to measure inflation?

consumer price index (cpi)

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

direct

In 2008, the prices on long-term U.S. Treasury bonds __________ .

gained 40%

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

is highly risky

In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of _______ month(s).

one

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

small-company common stock

Two ways of calculating average returns are _______ and _______.

the geometric average the arithmetic average

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

true

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

variance

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%

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%

Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ____ years.

20

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

From 1900 to 2010, the average stock market risk premium of the U.S. was ______.

7.2%

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

7.5%

With a normal distribution, the probability that we end up within two standard deviations is about _______ 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

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.

Which of the following are needed to describe the distribution of stock returns?

The standard deviation of returns The mean return

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

a larger

In an efficient market ______ investments have a _____ NPV.

all, zero

A positive capital gain on a stock results from ___.

an increase in price

Percentage returns are more convenient than dollar returns because they:

apply to any amount invested allow comparison against other investments

The percentage change in the price of a stock over a period of time is called its ___________.

capital gain yield

The average return on the stock market can be used to ___.

compare stock returns with the returns on other securities

The total return percentage is the ______ yield plus the capital gains yield.

dividend

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 and capital gains

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

True or false: Arithmetic and geometric averages are useful because they are not influenced by volatility.

false

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

false

True or false: From 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries.

false

True or false: In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of one year.

false

True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.

false

True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.

false

True or false: The average return of a given period is typically not a good estimate of the returns over that same period.

false

True or false: The dividend yield minus the capital gains yield is the total return percentage.

false

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

false

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

false

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

false

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

false ; (Pt+1 - Pt)/Pt

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

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

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 normal distribution is completely described by the _______ and ________.

mean variance or standard deviation

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

Normally, the excess rate of return is ___.

positive

The risk _______ can be interpreted as the reward for bearing risk.

premium

Historically, the real return on Treasury bills has been:

quite low

An unrealized gain is treated the same as a realized gain when computing the total

return

The arithmetic average rate of return measures the ____.

return in an average year over a given period

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

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

The variance and its square root, the ______ _______, are the most commonly used measures of volatility.

standard deviation

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

symmetrical bell-shaped

The geometric average rate of return is approximately equal to ___. an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:

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

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: A capital loss is the same thing as a negative capital gain.

true

True or false: The dividend yield = Dt+1/Pt

true

True or false: The normal distribution is completely described by the average and standard deviation.

true

True or false: The risk premium can be interpreted as a reward for bearing risk

true

Average returns can be calculated:

two different ways

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

well-organized