Finance 450-Test #4 CONCEPT REVIEW
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
The Consumer Price Index (CPI) is the most commonly used measure of _____________.
inflation
Based on the historical returns shown in the text, the average ________ was 2.9 percent per year over the 94-year span depicted.
inflation rate
An efficient market is one that fully reflects all available ______.
information
Stock prices fluctuate from day to day because of ___________.
information flow
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
Normally, the excess rate of return on risky assets is ___________.
positive
The arithmetic average rate of return measures the ____. Multiple choice question.
return in an average year over a given period.
The Sharpe ratio measures _________.
reward to risk
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
Geometric averages are _________ arithmetic averages.
smaller than
The geometric average rate of return is approximately equal to ________.
the arithmetic mean minus half of the variance
Average returns can be calculated ____________________.
two different ways: arithmetic average and geometric average method.
A distribution tends to have a smooth shape when the number of observations is ____________.
very large
The dividend yield __________ is defined as the annual dividend amount divided by the beginning stock price.
yield
The dividend_________ is defined as the annual dividend amount divided by the beginning stock price.
yield
Which of the following are true?
-T-bills sometimes outperform common stocks. -Common stocks may experience negative returns.
In an efficient market:
-all investments are zero NPV investments -assets are priced at the present value of their future cash flows
The Ibbotson-Sinquefield data shows that _________.
-long-term corporate bonds had less risk or variability than stocks -U.S. T-bills had the lowest risk or variability
The Ibbotson-Sinquefield data show that over the long-term, _________.
-small-company stocks had the highest risk level -small-company stocks generated the highest average return -T-bills, which had the lowest risk, generated the lowest return
Some important characteristics of the normal distribution are that it is:
-symmetrical -bell-shaped
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
A projected IRR (Internal Rate of Return) 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
If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit? Multiple choice question.
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: Multiple choice question.
Blume's formula
When a company declares a dividend, shareholders generally receive __________.
Cash
Strong form efficiency
It implies that all information of every kind is reflected in stock prices.
Semistrong 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.
The __________ratio is calculated as the risk premium of the asset divided by the standard deviation.
Sharpe
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. Multiple choice question.
Strong
Which of the following is commonly used to measure inflation?
The Consumer Price Index (CPI)
More volatility in returns produces ______ difference between the arithmetic and geometric averages.
a larger
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.
beginning stock price
The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ____________.
beginning stock price
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
The __________(greater/lower) the risk, the greater the required return.
greater