FRl3000 Ch 12 Connect study set

You bought one share of stock for $100 and received a 2$ dividend. If the price of the stock rose to $103, then your total dollar return would be _____.

$5 103-100+2 = 5

When dealing with the history of capital market returns, an average stock market is useful because it______

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

If the risk premium of stock MNO is 10 percent and the standard deviation is 40 percent, what is the Sharpe ratio?

.25

Palmer company had the following returns: 2009=12% 2010=10% 2011=-8% 2012=4% 2013=22% What is the variance of Palmer's returns?

0.0122

Look at the frequency distribution in Figure 12.9 and rank the following ranges of stock returns in order from highest to lowest frequency.

1. 10%-20% 2. 20%-30% 3. 0-10% 4. -10%-0

Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom.

1. U.S. Treasury Bills 2. Long-term corporate bonds. 3. Large corporate bonds .4. Small company stocks.

Suppose you buy a share of stock for $100. At the end of the year the stock price is $114 and the $1 dividend Is paid. If you do not sell the stock, your total annual return is_____

15%

If stock ABC has a mean return of 10 percent with a standard deviation of 5 percent, then the probability of earning a return greater than 15 percent is about _____ percent.

16 prob(R>15%) = (1-.68)/2

The standard deviation for large-company stock returns from 1926-2010 is:

19.9%

A share of common stock currently sells for $100 and will pay a dividend of $2 at the end of the year. If the price is expected to increase to $113 at the end of one year, what is the stock's current dividend yield?

2% ($2/$100)

In the Ibbotson-Sinquefield studies, long term corporate bonds have which of the following characteristics?

20 year maturities high quality

The probability of an outcome being within one standard deviation of the mean in a normal distribution is approximately _________ percent.

68

What is the arithmetic average return for a stock that has annual returns of 8%, 2%, and 11% for the past 3 years?

7%

More volatility in returns produces _____ difference between the arithmetic and geometric averages.

A larger.

Match each information type to the form of market efficiency that identifies that type of information as being quickly and accurately reflected in stock prices.

All information : Strong form Efficiency. All public information: Semi-strong form efficiency Historical stock prices: weak form efficiency

Which, of the following is a conclusion that can be drawn regarding market efficiency from capital market history?

Future market prices are hard to predict based on publicly available information.

Blume's formula combines

The arithmetic average return and the geometric average return.

Average returns can be calculated:

Two different ways.

-If a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by _____.

[(1.10)(1.20)]^5-1

The dividend yield for 1-year period is equal to the annual dividend amount divided by the _________.

beginning stock price

Which of the following are ways to make money by investing in stocks?

capital gains dividends

The total dollar return on a stock is the sum of the _________ and the ___________.

dividends; capital gains

In an efficient market should expect to receive _________ value of securities than they sell.

fair

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

The year 2008 was

one of the worst years for stock market investors in US history

Normally, the excess rate of return is _____.

positive

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.

Geometric averages are ________ arithmetic averages.

smaller than

Palmer Company had the following returns: 2009: 12%2010: 10%2011: -8%2012: 4%2013: 22%What is the standard deviation of Palmer's return?

11.05%

The geometric rate of return takes ______ into account.

Compounding.

Historically, there is a(n) _____ relationship between risk and expected return in the stock market.

Direct

Your total year-end value from a one-year investment equals the initial investment plus the total dollar return. It also equals the _______.

Proceeds from the stock sale plus dividends.

The Sharpe ratio measures _____.

Reward to risk.

Mona corporation has a variance of returns of 343, while Scott corporation has a variance of returns of 898. Which company's actual return vary more from their mean return?

Scott corporation

Kate corporation has discovered a very secret new product, but hasn't yet announced the discover to the public. If the stock price reacts before the announcements (assuming no corporate "leaks"), the market is:

Strong form efficient

The standard deviation is the _______ of the variance.

square root

If you buy 100 shares of ABC stock at $5 per share, your total investment is _____?

$500

-The price of a stock drops from $50 to $40 per share. If you own 50 shares, your total capital loss is _____.

$500

The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is _____.

$500

If the arithmetic return is 10% and the variance of returns is 0.05, find the approximate geometric mean.

(0.10 - ½ X 0.05 =) 7.5%

If you buy a stock for $50. After one year, its price rises to $55, and it pays a $2 dividend. You do not sell the stock. Your capital gains yield is _____.

([55 - 50]/50 =) 10%

The Ibbotson-Sinquefield data shows that ____

1. Long-term corporate bonds had less risk or variability than stocks. 2. U.S. T-bills had the lowest risk or variability

Studying market history can reward us by demonstrating that:

1. On average, investors will earn a reward for bearing risk. 2. The greater the potential reward is, the greater the risk.

Arrange the following investments from highest to lowest return based on what our study of capital market history has reveled about risk premiums.

1. small company common stock 2. long term corporate bonds 3. U.S. treasury bills

What will the dividend income be on 1000 shares of XYZ stock if XYZ distributes a $0.20 per share dividend?

1000 x .20 = $200

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.

If you are forecasting a few decades in the future you should calculate the expected return using:

Blume's formula

_____ were a bright spot for U.S. investors during 2008.

Bonds.

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

If the dispersion of returns on a particular security is very spread out from the security's mean return, the security _____

Is highly risky

Which are true about the historical equity risk premiums of the countries studied by Dimson, Marsh and Staunton?

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

The Ibbotson-Sinquefield presents rates of return from 1925 to recent times for:

Large company stocks long term US gov bonds.

Variance is measured in _____, while standard deviation is measured in _____.

Percent squared; percent

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

TRUE (without such professional traders, prices would fail to reflect all relevant information)

Commonly used to measure inflation

The Consumer Price Index (CPI)

Which of the following is true:

common stock may experience negative returns T-bills sometimes outperform common stocks

The average return on the stock market can be used to

compare stock returns with the returns on the securities

The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following

taxes inflation

If the annual stock market returns for Berry Company were 19 percent, 13 percent, and -8 percent, what was the arithmetic mean for those 3 years?

8%

Percentage returns are more convenient than dollar returns because they _____.

Apply to any amount invested.

In an efficient market:

- All investments have NPV=0 - Assets are priced at the present value of their future cash flows

Some important characteristics of the normal distribution are that it is

- Bell-shaped - Symmetrical

The efficient markets hypothesis contends that ____ capital markets such as the NYSE are efficient.

well-organized

A capital gain on a stock results from

An increase in stock price

A distribution tends to have a smooth shape when the number of observations is _________.

very large