Finance Block 4
If the arithmetic average return is 10% and the variance of returns is .05, find the approximate geometric mean.
0.10 - 0.05/2 = 0.075 or 7.5%
Studying market history can reward us by demonstrating that ______.
1.) There is a reward for bearing risk 2.) The greater the potential reward is, the greater the risk
A positive capital gain on a stock results from ______.
An increase in price
The dividend yield for a one-year period is equal to the annual dividend amount divided by the ______.
Beginning stock price
The percentage change in the price of a stock over a period of time is called its ______.
Capital Gain Yield
The percentage change in the price of a stock over a period of time is called its ______.
Capital gain yield
The total dollar return is the sum of dividends and ______.
Capital gains or losses
Historically, there is a(n) ______ relationship between risk and expected return in the financial markets.
Direct
The two potential ways to make money as a stockholder are through ______ and capital appreciation
Dividends
Which of the following are ways to make money by investing in stocks?
Dividends and Capital Gain
Dividends are the ______ component of the total return from investing in a stock.
Income
Stock prices fluctuate from day to day because of ______.
Information flow
What does the security market line depict?
It is a graphical depiction of the capital asset pricing model.
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future.
systematic risk is also called?
Market risk
Historically, the real return on Treasury bills has been ______.
Quite low
More volatility in returns produces ______ difference between the arithmetic and geometric averages.
a larger
The calculation of a portfolio beta is similar to the calculation of ______.
a portfolio's expected return
In an efficient market, firms should expect to receive ______ value for securities they se
fair
Unsystematic risk will affect ______.
firms in a single industry a specific firm
An efficient market is one that fully reflects all available ______.
information
What is the slope of the security market line (SML)?
market-risk premium
Systematic risk will ______ when securities are added to a portfolio.
not change
What are portfolio weights?
percentage of a portfolio's total value in a particular asset
The arithmetic average rate of return measures the ______.
return in an average year over a given period
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?
risk-free rate of return
Even if the portfolio is well diversified, the investor is still exposed to _____ risk.
systematic
which risk is not reduced by diversification?
systematic (aka market risk)
The geometric average rate of return is approximately equal to ______.
the arithmetic mean minus half the variance
The efficient markets hypothesis contends that______ capital markets such as the NYSE are efficient.
well-organized
