Finance Block 4

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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


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