Chapter 12 Finance

In an efficient market:

- All investments have NPV=0 - Assets are priced at the present value of their future cash flows

some important characteristics of the normal distribution are that it is

-bell shaped -symmetrical

the dividend yield for a 1-year period is equal to the annual dividend amount divided by the

beginning stock price

historically there is an ____ relationship between risk and expected return in the stock market

direct

Normally, the excess rate of return is on risky assets is _____

positive

Arrange the following investments in ASCENDING ORDER from highest to lowest return based on what our study on capital market history has reveled about risk premiums

1. Small company common stock 2. Long-term corporate bonds 3. US treasury bills

Probability of an outcome being within one standard deviation of the mean in a normal distribution is approximately ____ percent.

68

The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following?

Inflation & Taxes

An efficient market is one that fully reflects all available

Information

Mona Corporation has a variance of returns of 343, while Scott Company has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Company

a capital gain on a stock results from

an increase in stock price

the second lesson from studying capital market history is that risk is

handsomely rewarded

dividends are the ____ component of the total return from investing in a stock

income

Historically, the real return on Treasury bills has been:

quite low

the standard deviation is the ______ of the variance

square root

In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics?

-High quality -20-year maturities

Which of the following are true?

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

The Ibbotson-Sinquefield data show that over the long term, _____________.

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

what are ways to make money by investing in stocks?

-capital gains -dividends

The Ibbotson-Sinquefield data presents rates of return from 1925 to recent times for:

-large cap stocks -US T-bills -Small cap stocks

studying market history can reward us by demonstrating that

-the greater the potential reward is the greater the risk -there is a reward for bearing risk.

which of the following are true about the historical equity risk premiums of the countries studied by Dimson, Marsh, and Staunton?

-Denmark had the lowest equity risk premium -Italy had the highest equity risk premium

The square of the standard deviation is called the _______.

variance

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

well-organized