FRL3000 chapter 12
During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.
37
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 Reason: The variance of return measures the squared difference in the returns from their mean.
ratio is calculated as the risk premium of the asset divided by the standard deviation.
Sharpe
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 common stock long term corporate bonds us treasury bills
Which of the following is commonly used to measure inflation?
The Consumer Price Index (CPI)
The Ibbotson-Sinquefield data
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 in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom. Instructions Treasury Bills Small-company stocks Large-company stocks Long-term corporate bonds
U.S. Treasury Bills Long-term corporate bonds Large-company stocks Small-company stocks
More volatility in returns produces ______ difference between the arithmetic and geometric averages.
a larger
The second lesson from studying capital market history is that risk is _____.
handsomely rewarded
Dividends are the ______ component of the total return from investing in a stock.
income
The CPI is the most commonly used measure of
inflation
The year 2008 was _____.
one of the worst years for stock market investors in US history
Variance is measured in ___, while standard deviation is measured in ___.
percent squared; percent
Normally, the excess rate of return on risky assets is ___.
positive
The arithmetic average rate of return measures the ____.
return in an average year over a given period
The Sharpe ratio measures ___.
reward to risk
The Ibbotson-Sinquefield data show that over the long-term, ___.
small-company stocks had the highest risk level T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return
A distribution tends to have a smooth shape when the number of observations is ___.
very large
The dividend _________ is defined as the annual dividend amount divided by the beginning stock price.
yield
A normal distribution has a ______ shape.
symetrical
A projected IRR on a risky investment in the _____ percent range is not unusual.
10 to 20
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
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 (as you might do for retirement planning) you should calculate the expected return using:
blume's formula
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 two potential ways to make money as a stockholder are through ______ and capital appreciation.
dividends
The (greater/lower) the risk, the greater the required return.
greater
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
Greater return volatility produces a (smaller/larger) difference between the arithmetic and geometric averages.
larger
Geometric averages are ______ arithmetic averages.
smaller than
A capital gain on a stock results from an increase in ______.
stock price
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
Average returns can be calculated _____.
two different ways: arithmetic & geometric
When a company declares a dividend, shareholders generally receive ______.
cash
The second lesson from capital market history is that there is a direct link between _____ and reward.
risk
Which of the following are ways to make money by investing in stocks? (Select all that apply.)
Capital gains Dividends
Average returns can be calculated using _______ or arithmetic average.
geometric
The standard deviation is the ______ of the variance.
square root
Which of the following are true?
Common stocks may experience negative returns. T-bills sometimes outperform common stocks.
