Intro to Fin Mod 7

If you receive a $2 dividend per share on your 100 shares, your total dividend income is ----

$200

What will the dividend income be on 1000 shares XYZ stock if XYZ distributes a $020 per share dividend?

$200 $.20 x 1000 = $200

You bought a 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

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

$500

List investments in ascending order from lowest historical risk premium to highest

-US Treasury Bills -Long-term corporate bonds -Large-company stocks -Small-company stocks

List investments from highest to lowest return based on the study of capital market history has revealed about risk premiums.

-small company common stock -long term corporage bonds -US Treasury bills

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

.25 sharpe ratio = .1/.4=.25

One year ago Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?

15%

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 $110 at the end of the year, what is the stock's current dividend yield?

2% $2/$100 = 2%

The probability of an outcome being two standard deviations below the mean in a normal distribution is approximately ---- percent.

2.5

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

8%

What is true about the historical equity risk premiums of the countries studies by Dimson, Marsh and Staunton?

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

T/F: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock.

True

In an efficient market ---

all investments have NPV=0 assets are priced at the present value of their future cash flows

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

A capital gain on a stock results from ---

an increase in stock price

Percentage returns are more convenient than dollar returns because they ---

apply to any amount invested

---- were a bright spot for US investors during 2008

bonds

If you buy a stock for $10 and later sell it for $16 you will have a

capital gain of $6

The total dollar return is the sum of dividends and ---

capital gains and losses

What are ways to make money by investing stocks?

capital gains, dividends

Historically there is a --- relationship between risk and expected return in the stock market.

direct

The 2 potential ways to make money as a stockholder are through ---- and capital appreciation.

dividends

Roger Ibbotson and Rex Sinquefield;s research on historical rates of return---

does not adjust returns for inflation or taxes

In an efficient market, firms should expect to receive ---- value for securities they sell.

fair

What 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 imformation

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

The Ibbotson-Sinquefield data presents rates from 1925 to recent times for ---

long term US government bonds; large-company stocks

Historically the real return on Treasury bills has been ---

quite low

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

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

Geometric averages are ---arithmetic averages..

smaller than

Kate corporation has discovered a very secret new product, but hasnt yet announced the discovery to the public. IF the stock price reacts before the announcement (assuming no leaks) the market is ---

strong form efficient

The Ibbotson-Sinquefield data shows that over the long-term----

t-bills which had the lowest risk generated the lowest return; small company stocks generated the highest average return; small company stocks had the highest risk level

Blume's formula combines ---

the arithmetic average return and the geometric average return

The geometric average rate of return is approximately equal to ---

the arithmetic mean minus half of the variance

geometric average return

the average compound return earned per year over a multiyear period

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

efficient markets hypothesis (EMH)

the hypothesis that actual capital markets, such as the NYSE are efficient

What do you need to describe the distribution of stock returns?

the mean return; the standard deviation of returns

standard deviation

the positive square root of the variance

arithmetic average return

the return earned in an average year over a multiyear period

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

very large

The efficient markets hypothesis contends that ----- capital markets such as the NASDAQ are efficient.

well-organized

What will your capital gain be if you hold 40 shares BP stock and the stock price rises from $27 to$40 a share?

$520

What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc for $32?

$6400

If your total dollar return was $7 and your dividend was $2, then the price change on your stock must have been ----

+$5

The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is 000

$500

If ABC has a mean return on 10% with a standard deviation of 5% then the probability of earning a negative return is approximately -----

2.5%

The dividend yield for a 1 year period is equal to the annual dividend amount dividend by the ----

beginning stock price

The dividend yield for a 1 year period is equal to the annual dividend amount dividend by the -----

beginning stock price

The average return on the stock market can be used to ---

compare stock returns with the returns on other securities

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

In the Ibbotson-Sinquefield studies, long-term corporate bonds have what characteristics?

20 year maturities; high quality

The standard deviation for large company stock returns from 1926 to 2013 is

20.2%

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

7.5%

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

8%

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

Blume's formula

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

What is commonly used to measure inflation?

The Consumer Price Index (CPI)

More volatility in return produces ---- difference between the arithmetic and geometric averages.

a larger

efficient capital market

a market in which security prices reflect available information

Some important characteristics of the normal distribution are that it is ----

bell shaped and symmetrical

When a company declares a dividend, shareholders generally receive ---

cash

The geometric rate of return takes ---- into account.

compounding

An efficient market is one in which any change in available information will be reflected in the company's stock price ---

immediately

Dividends are the --- component of the total return from investing in a stock.

income

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

inflation and taxes

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

inflation and taxes

An efficient market is one that fully reflects all available ---

information

Stock prices fluctuate from day to day because of ---

information flow

The arithmetic average rate of return measures the ---

return in an average year over a given period

The Ibbotson-Sinquefield data shows that -----

long-term corporate bonds had less risk or variability than stocks; US T-bills had the lowest risk or variability

The Sharpe ratio measures ---

reward to risk

variance

the average squared difference between the actual return and the average return

risk premium

the excess return required from an investment in a risky asset over that required from a risk-free investment

The square of the standard deviation is equal to the ---

variance

normal idstribution

the symmetric bell-shaped frequency distribution that is completely defined by its mean and standard deviation