Chapter 10: Some lessons from capital market history
In an efficient market, firms should expect to receive ______ value for securities they sell.
- Strong for efficiency - all information - Semi-strong form efficiency - all public information - Weak form efficiency - historical stock prices
Which of the following are true based on the year-to-year returns from 1926-2014?
- T-bills sometimes outperform common stocks. - Common stocks frequently experience negative returns.
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
The normal distribution is completely described by the _______ and ________.
- variance or standard deviation - mean
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
2008 was a bad year for markets worldwide. One of the worst hit was the Icelandic Exchange where shares priced dropped _____ in one day.
76%
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 ways to make money by investing in stocks?
Dividends Capital gains
True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks.
False
True or false: The capital gains yield = (Pt+1 - Pt)/Dt
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
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
Geometric averages are usually ______ arithmetic averages.
Smaller
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: The dividend yield = Dt+1/Pt
True
In an efficient market ______ investments have a _____ NPV.
all; zero
To compute the return, the yearly returns are summed and then divided by the number of returns.
average
When a company declares a dividend, shareholders generally receive ____.
cash
The two potential ways to make money as a stockholder are through _______ and capital appreciation.
dividends
The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.
excess
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on types of financial investments.
five
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
An efficient market is one that fully reflects all available ______.
information
Stock prices fluctuate from day to day because of:
information flow
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____.
is highly risky
If you use a geometric average to project short-run wealth levels, your results will most likely be _______ .
pessimistic
Historically, the real return on Treasury bills has been:
quite low
The arithmetic average rate of return measures the ____.
return in an average year over a given period
The excess return is the difference between the rate of return on a risky asset and the ______ rate.
risk-free
Using capital market history as a guide, it would appear the greatest reward would come from investing in _______.
small-company common stock
The standard deviation is the ______ of the variance.
square root
Some important characteristics of the normal distribution are that it is:
symmetrical bell-shaped
The geometric average rate of return is approximately equal to ___.
the arithmetic mean minus half of the variance
Two ways of calculating average returns are _______ and _______.
the geometric average the arithmetic average
Average returns can be calculated:
two different ways
The square of the standard deviation is equal to the ____.
variance
If a study of past stock prices and volume to find mis-priced securities will not lead to gains in the market, then the market must be at least _____ efficient.
weak-form
The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.
well-organized
The Ibbotson SBBI 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
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%
Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926-2014 has revealed as shown in Table 10.3:
1. Small-company common stock 2. Large-company common stocks 3. Long-term corporate bonds 4. Long-term government bonds 5. U.S. Treasury bills
Arrange the following investments starting 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 stocks
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%
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
The second lesson from studying capital market history states that the _______ the potential reward, the _______ the risk
lower; lower greater; greater
If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______.
optimistic