Chapter 12

During the financial crisis of 2008 , the S & P 500 Index fell by ___ percent .

37

The ____ ratio is calculated as the risk premium of the asset divided by the standard deviation .

Sharpe

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

a larger

The ____ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price .

capital

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 or losses

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

The ____ the risk , the greater the required return .

greater

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

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

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 - company stocks 4. Small - company stocks

Bonds used in Ibbotson - Sinquefield's long - term U.S. government bond portfolio had maturities of ___ years .

20

The probability of an outcome being within t two standard deviations of the mean in a normal distribution is approximately ___ percent .

95

_____ formula is the equation that combines the arithmetic average return and the geometric average return

Blume's

If you are forecasting a few decades in the future ( as you might do for retirement planning ) you should calculate the expected return using :

Blume's formula

The ____ ratio is calculated as the risk premium of the asset divided by the standard deviation ..

Sharpe

Which of the following is commonly used to measure inflation ?

The Consumer Price Index ( CPI )

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

True

The second lesson from studying capital market history is that risk is

handsomely rewarded

In general , the arithmetic average return is probably too ____ for longer periods and the geometric average is probably too ____ for shorter periods .

high ; low

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

Based on the historical returns shown in the text , the average ____ was 2.9 percent per year over the 94 - year span depicted .

inflation

The CPI is the most commonly used measure of

inflation

The year 2008 was

one of the worst years for stock market investors in U.S. history

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

percent squared ; percent

The arithmetic average rate of return measures the

return in an average year over a given period .

The Sharpe ratio measures

reward to risk

Geometric averages are _____ arithmetic averages .

smaller than

Average returns can be calculated

two different ways

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

well - organized

The dividend ____ is defined as the annual dividend amount divided by the beginning stock price .

yield

The average return on the stock market can be used to

compare stock returns with the returns on other securities

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

fair

Kate Corporation has discovered a very secret new product , but hasn't yet announced the discovery to the public . If the stock price reacts before the announcement ( assuming no corporate " leaks " ) , the market is ____ form efficient .

strong

Which of the following are ways to make money by investing in stocks ? ( Select all that apply . )

•Dividends •Capital gains

Match the forms of market efficiency with their descriptions .

•Strong Form Efficiency: It implies that all information of every kind is . reflected in stock prices . •Semi-Strong Form Efficiency: It is the most controversial , and all public information is reflected in the stock price . •Weak Form Efficiency: It suggests that , at a minimum , the current price of a stock reflects the stock's own past prices .

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

When a company declares a dividend , shareholders generally receive

cash

The two potential ways to make money as a stockholder are through ____ and capital appreciation .

dividends

Average returns can be calculated using _____ or arithmetic average .

geometric

An efficient market is one that fully reflects all available

information .

Greater return volatility produces a ____ difference between the arithmetic and geometric averages .

larger

The probability of an outcome being more than three standard deviations away from the mean in a normal distribution is approximately ______ percent .

less than 1

The second lesson from capital market history is that there is a direct link between ____ and reward .

risk

The excess return on a risky asset is the difference between the risky return and the ____ rate .

risk - free

The standard deviation is the _____ of the variance .

square root

A capital gain on a stock results from an increase in

stock price

A normal distribution has a _____ shape .

symmetrical

In the Ibbotson - Sinquefield study , the U.S. small - company common stock portfolio corresponds to the bottom fifth , in terms of market value , of stocks traded on

the New York Stock Exchange

Blume's formula combines

the arithmetic average return and the geometric average return

A projected IRR on a risky investment in the ______ percent range is not unusual .

10 to 20

Based on average historical returns shown in the text , small - company stocks increased in value by ___ percent in a typical year .

16

True or false : Based on capital market history , market efficiency shows us that it is relatively simple to identify stocks that are incorrectly priced .

False

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

very large

Stock prices fluctuate from day to day because of

information flow

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

dividends ; capital gains

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

Which of the following are true ?

•T - bills sometimes outperform common stocks •Common stocks may experience negative returns

In an efficient market :

•assets are priced at the present value of their future cash flows •all investments are zero NPV investments

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

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

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

The Ibbotson - Sinquefield data show that over the long - term ,

•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

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

beginning stock price