chapter 10 - finance

capital gain yield

The % change in the price of a stock over a period of time

overreaction and correction

When there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock

More volatility in returns produces what?

a larger difference between the arithmetic and geometric averages

The average return on the stock market can be used to do what?

compare stock returns with the returns on other securities

The normal distribution is

completely described by the variance or standard deviation and mean

You can make money by

investing in stocks by capital gains/appreciation and dividends

The geometric rate of return takes what into account

it takes takes compounding into account

Percentage (%) returns are more convenient than dollar returns because they

o Apply to any amount invested o Allow comparison against other investments

2 ways of calculating average returns

o Arithmetic average o Geometric average

The dividend yield for a one year period is equal to

the annual dividend amount divided by the beginning stock price

The geometric average rate of return is approximately equal to

the arithmetic mean minus half of the variance

The excess rate of return is

the difference between the rate of return on a risky asset and the risk-free rate of return

There is a reward for bearing risk

the greater the potential reward, the greater the risk

Arithmetic average rate of return measures

the return in an average year over a given period

Dividends are the income component of what?

the total return from investing in a stock

The square of the St dev is equal to

the variance

Using the arithmetic average

your results will most likely by optimistic

Using the geometric average

your results will most likely by pessimistic