Principles of Finance Ch 10

If stock GHI has returns of 6% and -2% over 2 years, the geometric average rate of return is ________.

(1.06)(.98)^5-1=1.92%

Which of the following are true?

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

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

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

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 term efficiency *historical stock prices-weak form efficiency

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

* bell-shaped *symmetrical

Arrange the following investments from highest 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 government bonds 4. long-term corporate bonds 5. U.S. Treasury Bills

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

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

8.246% (variance= divide by the number of returns minus 1)

A positive capital gain on a stock results from __________.

an increase in price

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

dividends;capital gains

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

excess

In 2008, the prices on long-term U.S. Treasury bonds _________.

gained 40%

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

handsomely rewarded

An efficient market is one that fully reflects all available_______.

information

Stock prices fluctuate day to day because of:

information flow

The year 2008 was:

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

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

pessimistic

Historically, the real return on Treasury bills has been:

quite low

The arithmetic average rate of return measures the ________

return in an average year over a given period

The standard deviation is the ________ of the variance.

square root

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

variance

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

well-organized

Two ways of calculating average returns are ____ and ______.

* geometric average * arithmetic average

Studying market history can reward us by demonstrating that:

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

Percentage returns are more convenient than dollar returns because they:

*allow comparison against other investments *apply to any amount invested

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

*dividends *capital gains

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

*less, less *more, more

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

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

*the mean return *standard deviation of returns

If stock ABC has a mean return of 10 percent with a standard deviation of 5%, then the probability of earning a return greater than 15% is about __________ percent.

16

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 ________%.

4

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

7.5% .10-1/2x.05=7.5

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

beginning stock price

The percentage change in the price of a stock over a period of time is called its___________.

capital gain yield

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

income