Chapter 10 Lessons from capital history

If you receive a $2 dividend per share on your 100 shares, your total dividend income is ____.

$2 x 100

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

-symmetrical -bell-shaped

The _______ price index is a commonly used measure of inflation.

Consumer

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

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

-The standard deviation of returns -The mean return

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

-lower; lower -greater; greater

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

2.5%

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

False. It takes 20 years.

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. It takes one month

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

False. T-bills sometimes outperform common stocks.

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

False. The larger.

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

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

True or false: The average return of a given period is typically not a good estimate of the returns over that same period.

False. Without any other information, you can use the average return from a time period as a "best guess" of the return in a given year from that same period.

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

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

Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.

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

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

68

From 1900 to 2010, the average stock market risk premium of the U.S. was ______.

7.2%

2008 was a bad year for markets worldwide. One of the worst hit was the Icelandic Exchange where shares priced dropped _____ in one day.

76%

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

True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.

False

True or false: The capital gains yield = (Pt+1 - Pt)/Dt

False.

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

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

True

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

well-organized

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

five

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

The total dollar return is the sum of dividends and __________.

capital gains or losses

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

risk-free

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

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 risk ___ can be interpreted as the reward for bearing risk

premium

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

-Capital gains -Dividends

Percentage returns are more convenient than dollar returns because they:

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

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

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:

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

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

10

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

37

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 effiency All public information- Semi strong form efficiency Historical stock prices- weak form

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

Bonds

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

False

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

True

What will the dividend income be on W number of shares of XYZ stock if XYZ distributes a $Y per share dividend?

W x $Y

In an efficient market ______ investments have a _____ NPV.

all; zero

A positive capital gain on a stock results from ___.

an increase in price

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

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

cash

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

compare stock returns with the returns on other securities

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

dividends

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

fair

True or false: From 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries.

false

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

higher

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

income

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

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

mean

Normally, the excess rate of return is ___.

positive

The standard deviation is the ______ of the variance.

square root

The variance and its square root, the_______, are the most commonly used measures of

standard deviation

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

variance

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

variance or standard deviation and mean

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

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

return