Finance SB Chapter 10

True or false: The geometric average rate of return measures the return in an average year over a given period.

False

True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.

False

True or false: The dividend yield = Dt+1/Pt

True

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

bell-shaped symmetrical

The total return percentage is the ____ yield plus the capital gains yield

dividend

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

Historically, the real return on Treasury bills has been:

quite low

An unrealized gain is treated the same as a realized gain when computing the total ____

return

The arithmetic average rate of return measures the ____.

return in an average year over a given period

Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets.

true

The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:

2.5%

In 2008, the S&P 500 plunged ___ %.

37%

The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately ___ percent.

68

The standard deviation for large-company stock returns from 1926 to 2017 is:

76%

True or false: In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of one year.

False

True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.

False Average return = sum of yearly returns / number of returns

Which of the following are true based on the year-to-year returns from 1926-2014?

T-bills sometimes outperform common stocks. Common stocks frequently experience negative returns.

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

excess

If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______.

optimistic

Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?

overreaction and correction

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

pessimistic

Arrange the following investments starting from lowest historical risk premium to highest historical risk premium. Large-company stocks U.S. Treasury Bills Small-company stocks Long-term corporate bonds

U.S. Treasury Bills, Long-term corporate bonds, large-company stocks, small company stocks

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

beginning stock price

When a company declares a dividend, shareholders generally receive ____.

cash

An efficient market is one that fully reflects all available ______.

information

Stock prices fluctuate from day to day because of:

information flow

The standard deviation is the ______ of the variance.

square root

Treasury Bills yielded a nominal average return over 86 years of 3.5% versus an average inflation rate of 3.0% over the same period. This makes the real return on T-bills approximately equal to _____.

3.5-3.0 = 0.5%

A positive capital gain on a stock results from ___.

an increase in price

If a study of past stock prices and volume to find mis-priced securities will not lead to gains in the market, then the market must be at least _____ efficient.

weak-form

The Ibbotson SBBI data show that over the long-term, ___.

small-company stocks had the highest risk level T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return

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

variance or standard deviation mean

The arithmetic mean for large-company stock returns from 1926 to 2017 is:

12.1%

The capital gains yield = (Pt+1 - Pt)/Pt

true

Average returns can be calculated:

two different ways

A dividend yield of 10% says that, for each dollar we invest, we get _ cents in dividends

10

Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926-2014 has revealed as shown in Table 10.3:

Small-company common stock Large-company common stocks Long-term corporate bonds Long-term government bonds U.S. Treasury bills

In an efficient market ______ investments have a _____ NPV.

all; zero

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

handsomely rewarded

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 efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.

well-organized

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

Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ____ years.

20

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

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

Capital gains Dividends

True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks.

False

True or false: 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

True or false: A capital loss is the same thing as a negative capital gain.

True

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

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

dividends

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

dividends; capital gains

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

fair

True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.

false

True or false: The dividend yield minus the capital gains yield is the total return percentage.

false

Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on _ types of financial investments.

five

Two ways of calculating average returns are _______ and _______.

geometric and arithmetic average

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

To get the average, or ___ return, the yearly returns are summed and then divided by the number of returns.

mean

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

risk-free

Geometric averages are usually ______ arithmetic averages.

smaller than

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

the arithmetic mean minus half of the variance

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

variance

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. all information - all public information - historical stock prices - weak form efficiency semi-strong form efficiency strong form efficiency

all information: strong form efficiency all public information: semi-strong form efficiency historical stock prices: weak form efficiency

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

greater; greater lower; lower

The risk-return relationship states that a riskier investment should demand a ____________ return.

higher

If a study of a firm's financial information will not lead to gains in the market, then the market must be at least _____ efficient.

semi-strong form

Using capital market history as a guide, it would appear the greatest reward would come from investing in _______.

small-company common stock

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

one