FIN 780 Exam 2 - Ch 10 Sample Concept Questions Pt 1 (STOCK & RETURNS)

A frequency distribution of stock returns displays ________. (& what does it look like?)

* The frequency of occurrence for each rate of return range & * Various ranges of returns on the horizontal axis

The Ibbotson SBBI data show that over the long-term, ________.

*Small-co stocks generated the highest aver. return *T-bills had lowest risk and lowest return *Small-co stocks had highest risk level

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

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

Arithmetic average return for a stock that had annual returns of 3%, 2%, -6%, 7%, and 9% over the past 5 yrs.

3% (R1+R2+R3+R4+R5)/5yrs

In 2015, the US stock market represented about ____ % of the world stock mkt capitalization. 38 73 42

38% of world stock market capitalization

going back to 1900, the US historical equity risk premium on average is _____ % Options: 7.2 6.8 4.3

7.2

US ranked ___th in terns of having the highest equity risk premium

7th

Long-run average risk premium for common stocks for the period of 1926-2015 was ______%. Options: 10.0% 11.8% 8.4%

8.4%

Percentage returns are more convenient than dollar returns because they:

Apply to any amount invested

The excess rate of return is generally ______ over the long term AND can occasionally be _________.

Is generally positive over the long term and can occasionally be negative.

Geometric averages are usually _____ than arithmetic averages.

Smaller than arithmetic averages

Rates of return in the Ibbotson SBBI yearbook are NOT adjusted for which of the following?

Taxes and transaction costs

T or F T-Bills sometimes outperform common stocks

True - T-bills sometimes outperform common stocks

The ____ mean is the best estimate of next year's return

arithmetic mean

The geometric rate of return takes _____ into account

compounding

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

difference between the risky return and the risk-free rate

Arithmetic average rate of return measures the ______.

return in an average year over a given period.

Using the Ibbotson SBBI yearbook, year by year real returns can be calculated by subtracting the annual _______ rate from the annual ______ rate __ _______.

subtracting the annual inflation rate from the annual historical rate of return

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

the sum of the Dividends and capital gains

Assumptions related to the ____ _______ of future investors & future ______ environment are critical for forecasting future U.S. equity premiums

Assumptions related to the risk aversion of future investors & future risk environment

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

Compare stock returns with returns on other securities.

In the historical equity risk premium study by Dimson, Marsh, and Staunton: Denmark had the ____ equity risk premium & Italy had the ____ equity risk premium

Denmark had the lowest equity risk premium & Italy had the highest equity risk premium

The average excess return on common stocks is called the ______ risk premium.

Equity risk premium

The _____ rate of return is the difference between risky returns and risk-free returns.

Excess rate of return

What is the holding period rate of return?

the rate of return over some arbitrary investment period.

True or False - Common stocks frequently experience negative returns?

true - common stocks frequently experience negative returns