FIN630-C12

If you invested $100 and made a total dollar return of $10 over the course of the year, your year-end total cash if the stock is sold would be ____.

$110= 100 + 10

What will the dividend income be on 1000 shares of XYZ stock if XYZ distributes a $0.20 per share dividend?

$200

What will your captial gain be if you hold 40 shares of BP stock and the stock price rises from $27 to $40 a share?

(40 X [$40 - 27] =) $520

Which of the following are true about the historical equity risk premiums of the countries studied by Dimson, Marsh, and Staunton?

-Denmark had the lowest equity risk premium -Italy had the highest equity risk premium

If the risk premium of stock JKL is 5 percent while the standard deviation is 10 percent, then the Sharpe ratio equals

.5

If stock ABC has a mean return of 10 percent with a standard deviation of 5 percent, then the probability of earning a negative return is approximately ___ percent.

0% is 2 SDs below the mean (0.10-(2 & *0.05) Probability of R being more than two standard deviations from the mean is (1- 0.95), but that means either two standard deviations above or below the mean. The probability of it being 2 standard deviations below the mean, divide by w (half are above and half are below in a normal distribution) 0.05/2 == 2.5 %2.5%

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

1. Small-company common stock 2. Long-term corporate bonds 3. 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 information 2. Semi-strong form efficiency - all public information 3. Weak form efficiency - historical stock prices

In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics?

20 year maturities & high quality

What is the arithmetic average return for a mutual fund that reported a return of 5 percent every year for the last 3 years?

5%

The probability of an outcome being within +- one standard deviation of the mean in a normal distribution is approximately _____ percent.

68

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.

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

_____ were a bright spot for U.S investors during 2008.

Bonds

Which of the following is a conclusion that can be drawn regarding market efficiency from captial market history.

Future market prices are hard to predict based on publicly available information.

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

Immediately

The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following?

Inflation Taxes

The Ibbotson-Sinquefield data presents rates of return from 1925 to recent times for:

Large company stocks & long term US gov bonds.

Which of the following are true? T-bills sometimes

T-bills sometimes outperform common stocks; common stocks frequently experience negative returns

The ibbotson-sinuefield 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; and small-company stocks generated the highest average return

T/F: The existence of traders attempting to beat the market is necessary precondition for markets to become efficient.

TRUE (without such professional traders, prices would fail to reflect all relevant information)

Which of the following is commonly used to measure inflation

The Consumer Price Index (CPI)

(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

-If a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by _____.

[(1.10)(2.20)]^.5 - 1

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

a larger

Which of the following are ways to make money by investing in stocks?

captial gains dividends

The geometric rate of return takes _____ into account.

compounding

Historically, there is a(n) _____ relationship between risk and expected return in the stock market.

direct

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

dividends; capital gains

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

income

Stock prices fluctuate from day to day because of:

information flow

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

is highly risky.

The year 2008 was:

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

Historically, the real return on Treasury bills has been:

quite low

The Sharpe ratio measures ____.

reward to risk

Geometric averages are ____ arithmetic averages.

smaller than.

Kate corporation has discovered a very secret new product, but hasn't yet announced the discover to the public. If the stock price reacts before the announcements (assuming no corporate "leaks"), the market is:

strong form efficient

Blume's formula combines

the arithmetic average return and the geometric average return

The geometric average rate of return is approximately equal to _____.

the arithmetic mean minus half of the variance

The arithmetic average rate of return measures the ______.

the return in an average year over a given period

Average returns can be calculated:

two different ways

The square of the standard deviation is equal to the ____.

variance

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

very large

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

well-organized

You brought one share of stock for $100 and received a $2 dividend. If the price of the stock rose to $103, then your total dollar return would be ____.

$5 = 103 - 100 + 2

If you buy 100 shares of ABC stock at $5 per share, your total investment is

$500

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

$500 (2500-2000)

Studying market history can reward us by demonstrating that:

-there is a reward for bearing risk - the greater the potential reward is, the greater the risk

Palmer Company had the following returns: 2009: 12% 2010: 10% 2011: -8% 2012: 4% 2013: 22% What is the variance of Palmer's returns?

0.0122

Look at the frequency distribution in Figure 12.9 and rank the following ranges of stock return in order from highest to lowest frequency.

1. 10%-20% 2. 20%-30% 3. 0-10% 4. -10%-0

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 corporate bonds. 4. Small company stocks.

What is the arithmetic average return for a stock that had annual returns of 8%, 2% and 11% for the past 3 years?

7%

If the annual stock market returns for Berry Company were 19 percent, 13 percent, and -8 percent, what was the arithmetic mean for those 3 years?

8%

A capital gain on a stock results from _____.

an increase in stock price

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

beginning stock price

Some important characteristics of the normal distribution are that it is:

bell-shaped symmetrical

If you buy a stock for $10 and later sell it for $16, you will have a _____.

capital gain of $6

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

handsomely rewarded

The standard deviation for large-company stock returns from 1925 to 2016 is:

19.9%

You can buy a stock for $100. In one year its price rises to $114, and it pays a $1 dividend. Your capital gains yield is _____.

14%

Mona Corporation has a variance of returns of 343, while Scott Company has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Company

Palmer Company had the following returns: 2009: 12% 2010: 10% 2011: -8% 2012: 4% 2013: 22% What is the standard deviation of Palmer's return?

11.04%

One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?

15%

Percentage returns are more convenient than dollar returns because they:

allow comparison against other investments apply to any amount invested

The average return on the stock market can be used to _____.

a. compare stock returns with the returns on other securities

In an efficient market:

all investments have NPV=0 Assets are priced at the present value of their future cash flows

The ____ rate of return is the difference between risky returns and risk-free returns.

excess

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

fair

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

percent squared percent

When dealing with the history of captial market returns, an average stock market return is useful because it _____.

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

The standard deviation is the _____ of the variance.

square root