FIN 780 Exam 2 - Ch 10 Sample Concept Questions Pt 1 (STOCK & RETURNS)
A frequency distribution of stock returns displays ________. (& what does it look like?)
* The frequency of occurrence for each rate of return range & * Various ranges of returns on the horizontal axis
The Ibbotson SBBI data show that over the long-term, ________.
*Small-co stocks generated the highest aver. return *T-bills had lowest risk and lowest return *Small-co stocks had highest risk level
When dealing with the history of capital market returns, an average stock market return is useful because it ________....... and _____________......
*simplifies detailed market data & *is the best estimate of any one year's stock market return during the specified period.
Arithmetic average return for a stock that had annual returns of 3%, 2%, -6%, 7%, and 9% over the past 5 yrs.
3% (R1+R2+R3+R4+R5)/5yrs
In 2015, the US stock market represented about ____ % of the world stock mkt capitalization. 38 73 42
38% of world stock market capitalization
going back to 1900, the US historical equity risk premium on average is _____ % Options: 7.2 6.8 4.3
7.2
US ranked ___th in terns of having the highest equity risk premium
7th
Long-run average risk premium for common stocks for the period of 1926-2015 was ______%. Options: 10.0% 11.8% 8.4%
8.4%
Percentage returns are more convenient than dollar returns because they:
Apply to any amount invested
The excess rate of return is generally ______ over the long term AND can occasionally be _________.
Is generally positive over the long term and can occasionally be negative.
Geometric averages are usually _____ than arithmetic averages.
Smaller than arithmetic averages
Rates of return in the Ibbotson SBBI yearbook are NOT adjusted for which of the following?
Taxes and transaction costs
T or F T-Bills sometimes outperform common stocks
True - T-bills sometimes outperform common stocks
The ____ mean is the best estimate of next year's return
arithmetic mean
The geometric rate of return takes _____ into account
compounding
The excess return on a risky asset is the difference between the risky return and the _____ rate.
difference between the risky return and the risk-free rate
Arithmetic average rate of return measures the ______.
return in an average year over a given period.
Using the Ibbotson SBBI yearbook, year by year real returns can be calculated by subtracting the annual _______ rate from the annual ______ rate __ _______.
subtracting the annual inflation rate from the annual historical rate of return
Total dollar return on a stock is the sum of the ____ and the _____.
the sum of the Dividends and capital gains
Assumptions related to the ____ _______ of future investors & future ______ environment are critical for forecasting future U.S. equity premiums
Assumptions related to the risk aversion of future investors & future risk environment
The average return on the stock market can be used to ______.
Compare stock returns with returns on other securities.
In the historical equity risk premium study by Dimson, Marsh, and Staunton: Denmark had the ____ equity risk premium & Italy had the ____ equity risk premium
Denmark had the lowest equity risk premium & Italy had the highest equity risk premium
The average excess return on common stocks is called the ______ risk premium.
Equity risk premium
The _____ rate of return is the difference between risky returns and risk-free returns.
Excess rate of return
What is the holding period rate of return?
the rate of return over some arbitrary investment period.
True or False - Common stocks frequently experience negative returns?
true - common stocks frequently experience negative returns
