FINANCIAL MANAGEMENT

You buy a stock for $50. Its 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%

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?

($114-100+$1)/$100 = 15%. 15%

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

2.5%.

__________ were a BRIGHT spot for U.S. investors during 2008.

Bonds.

Roger _____ and Rx _______ presented year-to-year historical rates of return on five important types of financial investments.

Ibbotson, Sinquefield.

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

[(1.10)/(1.20)]^5 -1.

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

a larger.

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

cash.

The GEometric rate of return takes ____________ into account.

compounding.

From 1990 to 2010, the U.S. ranked __________ when compared internationally in terms of highest risk premium.

in the middle.

The capital gain 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 you use a GEometric average to project short-run wealth levels, your results will most likely be _______.

pessimistic.

Normally, the EXCESS RATE of Return is _________

positive

Historically, the REAL Return on Treasury bills has been:

quite low.

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

variance

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

well-organized

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

1. Capital gains. 2. Dividends.

Two ways of calculating average returns are ________ and _________.

1. The arithmetic Average 2. The geometric average.

Suppose you bought 110 shares of Banks & Bower, Inc. for $50 a share. During the year, B & B paid $0.50 per share dividend. At year end, B&B was selling for $60 a share. What is your total percentage?

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

The price of XYZ stock rises from $10 t0 $15. If you own 100 shares, your capital gain is?

$500.00

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

The Ibbotson-Sinquefield data shows that:

1. Long-term corporate bonds had less risk or variability than stocks. 2. U.S. T-bills had the lowest risk or variability.

Arrange the following investments from HIGHEST RISK to LOWESt risk (standard deviation) based on what our study of capital market history from 1926 -2011 has revealed as shown in table 10:10

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

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

14%

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

20.

The standard deviation for large-company stock returns from 1926 to 2014 is:

20.1%

What is the arithmetic average return for a stock that has 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%.

If a series of stock returns has a variance of 0.0068, what is the standard deviation?

8.246%

The dividend yield one-year period is equal to the manual dividend amount divided by the _________.

beginning stock price.

in 2008, the prices of Long-term U.S. Treasury bonds ____________.

gained 40%.

The lesson from studying capital market history states the _________ the potential reward, the _______ the risk.

greater, greater. Less, less

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

handsomely rewarded.

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

higher

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

one

Arrange the following investments in ASCENDING ORDER from LOWEST historical risk premium to highest historical premium.

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

If the arithmetic average return is 10% and the variance of return is 0.05, find the approximate geometric mean?

0.10 -1/2 * 0.05 = 7.5% 7.5%

The Ibbotson-Sinquefield data shows that:

1. Long-term corporate bonds had less risk or variability than stocks. 2. U.S. T-bills had the lowest risk or variability

Which of the following are needed to describe the distribution of stock returns?

1. The Mean Return. 2. The standard deviation of returns.

True or False: The PREMIUM can be interpreted as a reward for bearing risk?

True.

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

immediately

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 of T-Bills approximately equal to ____.

3.5%-3.0% = 0.5%

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

Overreaction and correction.

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI).

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

1. Mean. 2. Variance or standard deviation.

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.

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

An efficient market reaction.

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

Capital gain of $6

The average rate of return on the stock market can be used to _______.

Compare stock returns on other securities.

If stock GHI has returns of 6%, and -2% over 2 years, the GEOMETRIC Average rate of return is ____.

[(1.06)(0.980]^5-1 = 1.92%

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

dividends; capital gains.

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

fair

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 standard deviation is the _____ of the variance.

square root

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

optimistic.

Percentage returns are more convenient that dollar returns because they:

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

Which of the following are true?

1. Common stocks frequently experience negative returns. 2. T-Bills sometimes outperformed common stocks.

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

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

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 : Strong form Efficiency. All public information: Semi-strong form efficiency Historical stock prices: weak form efficiency.

Geometric averages are usually __________ Arithmetic averages.

smaller than.