Chp 10: capital Market History

You buy stock for $50. It's price rises to $55, and it pays a $2 dividend in a year. You do not sell the stock. Your dividend yield is ______%.

$2/$50 = 4%

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

Immediately

From 1900 to 2010, the US ranked _____ when compared internationally in terms of highest equity risk premium.

In the middle (7.2%)

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

Income

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

beginning stock price

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

($50-$40) x 50 = $500

Suppose you bought 100 shares of B&B, Inc. for $50 a share. During the year, B&B paid a $0.50 per share dividend. At year end, B&B was selling for $60 a share. What is your total percentage return?

(60-50+0.50)/50 = 21%

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

+$5

If stock ABC has a mean return of 10% with a SD of 5%, then the probability of earning a negative return is approximately ____%.

0% is 2 SDs below the mean. Prob(R<0%) = (1-.95)/2 = 2.5%

Percentage returns are more convenient than dollar returns because they

1. Allow comparison against other investments 2. Apply to any amount invested

Bonds used in Ibbotson-Sinquefield's long-term US government bond portfolio had maturities of _____ years.

20

The SD for large-company stock returns from 1926-2011 is

20.3%

The probability of a return being +/- one SD of the mean in a normal distribution is approximately

68%

Arithmetic average return

Add up all annual returns then divide by number of years

If the market changes and stock prices instantly and fully reflect new information, which time path does a change exhibit?

An efficient market reaction

Efficient market hypothesis (EMH)

Asserts that well-organized capital markets, such as NYSE, are efficient markets, at least in a practical matter

______ 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 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

T-bills sometimes outperform

Common stocks

The second lesson from studying capital market history states that the ______ the potential reward, the ______ the risk.

Less, less Greater, greater

Common stocks frequently experience

Negative returns

In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of _____ month.

One

The year 2008 was

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

The geometric average rate of return is approximately equal to

The arithmetic mean minus half of the variance

Excess rate of return

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

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

Lowest historical risk to highest historical risk

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

What will the dividend income be on 1000 shares of XYZ stock if XYZ distributes a $.20 per share dividend?

1000 x .20 = $200

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

15% is one SD above the mean Prob(R>15%) = (1-.68)/2 = 16%

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

Fair

Studying market history can reward us by demonstrating that

1. There is a reward for bearing risk 2. The greater the potential reward is, the greater the risk

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

A larger

The average return on the stock market can be used to

Compare stock returns with the returns of other securities

The geometric rate of return takes _____ into account.

Compoundig

Commonly used to measure inflation

Consumer Price Index (CPI)

Ways to make money by investing in stocks

Dividends Capital gains

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

Is highly risky

Investments from highest to lowest risk (standard deviation) 1926-2011

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

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

1. Strong for efficiency - all information 2. Semi-strong form efficiency - all public information 3. Weak form efficiency - historical stock prices

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

1. T-bills, which had the lowest risk, generated the lowest rerun 2. Small company stocks had the highest risk level 3. Small-company stocks generated the highest average return

Two ways of calculating average returns are ____ and _____.

1. The geometric average 2. The arithmetic average

What is needed to describe the distribution of stock returns?

1. The standard deviation of returns 2. The mean return

A capital gain on a stock results from

An increase in price

If you us a geometric average to project short-run wealth levels, your results will most likely be

Pessimistic

Historically, the real return on Treasury bills has been

Quite low

The square of the standard of deviation is equal to the

Variance

The normal distribution is completely described by the ______ and _______.

Variance or standard deviation, mean