Ch 10 SmartBook

Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926 to 2014 has revealed as shown in Table 10.3.

1. Small company common stock. 2. Large company common stock. 3. Long-term corporate bonds. 4. Long term government bonds. 5. U.S. Treasury bills.

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.

1. Strong for efficiency - all information2. Semi-strong form efficiency - all public information3. Weak form efficiency - historical stock prices

Click and drag on elements in order Arrange the following investments starting from the lowest historical risk premium and ending with the highest historical risk premium.

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

A dividend yield of 10 percent says that, for each dollar we invest, we get _____________cents in dividends.

10

The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:

2.5%

The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately ___ percent.

68

The variance and its square root, the ____________ ______________ , are the most commonly used measures of volatility.

Blank 1: standard Blank 2: deviation

True or false: Arithmetic and geometric averages are useful because they are not influenced by volatility.

F

True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.

F

If the arithmetic average return is 10% and the variance of returns is .05, find the approximate geometric mean.

Reason: Correct; .10 - .05/2 = .075 or 7.5%

True or false: 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.

T

True or false: A capital loss is the same thing as a negative capital gain.

T

True or false: The dividend yield = Dt+1/Pt

T

True or false: The risk premium can be interpreted as a reward for bearing risk.

T

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

a larger

A positive capital gain on a stock results from ______.

an increase in price

Select all that apply Percentage returns are more convenient than dollar returns because they ______. Multiple select question. avoid using the dollar sign apply to any amount invested allow comparison against other investments are more accurate than dollar amounts

apply to any amount invested allow comparison against other investments

The dividend yield for a one-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

Select all that apply Some important characteristics of the normal distribution are that it is ______. Multiple select question. skewed to the right bell-shaped symmetrical very "bumpy" and not smooth

bell-shaped symmetrical

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

The geometric average return is the average __________________ return earned per year over a multiyear period.

compound

The geometric rate of return takes ______ into account.

compounding

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? Multiple select question. dividends capital gains amortization interest

dividends capital gains

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

dividends; capital gains

The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.

excess

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

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

Select all that apply The Ibbotson-Sinquefield data show that ______. Multiple select question. inflation was always higher than the T-bill yield long-term corporate bonds had less risk or variability than stocks U.S. T-bills had the lowest risk or variability large common stocks had higher returns than small common stocks

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

Select all that apply The normal distribution is completely described by the ______ and ______. mean median variance or standard deviation correlation coefficient

mean variance or standard deviation

If you use an arithmetic average to project long-run wealth levels, your results will most likely be ______.

optimistic

Normally, the excess rate of return is ______.

positive

An unrealized gain is treated the same as a realized gain when computing the total_______________ . (Enter only one word per blank.)

return

The arithmetic average rate of return measures the ______.

return in an average year over a given period

Using capital market history as a guide, it would appear the greatest reward would come from investing in ______.

small-company common stock

Select all that apply The Ibbotson SBBI data show that over the long-term, ______. large-company stocks generated the highest average return small-company stocks had the highest risk level small-company stocks generated the highest average return long-term corporate bonds had the lowest risk T-bills, which had the lowest risk, generated the lowest return

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

Geometric averages are usually ______ arithmetic averages.

smaller than

Select all that apply Which of the following are needed to describe the distribution of stock returns? Multiple select question. the life span of the stock the variety of returns the mean return the standard deviation of returns

the mean return the standard deviation of returns

True or false: The capital gains yield = (Pt+1 − Pt)/Dt.

F

True or false: The dividend yield minus the capital gains yield is the total return percentage.

F

True or false: The geometric average rate of return measures the return in an average year over a given period.

F

True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.

F

The total return percentage is the _______________yield plus the capital gains yield.

dividend

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

fair

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 you use a geometric average to project short-run wealth levels, your results will most likely be ______.

pessimistic

The risk can be interpreted as the reward for bearing risk.

premium

Select all that apply Two ways of calculating average returns are ______ and ______. Multiple select question. the arithmetic average the progressive average the common average the geometric average

the arithmetic average the geometric average

Average returns can be calculated ______.

two different ways

If a study of past stock prices and volume to find mispriced securities will not lead to gains in the market, then the market must be at least ______ efficient.

weak form