Chapter 12: Some Lessons from Capital Market History

If you invested $100 and made a total dollar return of $10 over the course of one year, your year end total cash if the stock is sold would be ____.

$110 100 + 10 = 110

If you buy 40 shares of BP stock at $35 per share, your total investment in BP is _____.

$1400 40 * 35 = 1400

What will the dividend income be on 1000 shares of XYZ stock if XYZ distributes a $0.20 per share dividend?

$200 1000 * .20

You bought one share of stock for $100 and received a 2$ dividend. If the price of the stock rose to $103, then your total dollar return would be _____.

$5 Dividends = 2 capital gains = (103-100) * 1 = 3 3 + 2 = 5

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

$500 (15-10) * 100 = 500

-The price of a stock drops from $50 to $40 per share. If you own 50 shares, your total capital loss is _____.

$500 (50-40) * 50 = 500

Capital gains yield

(Current price of stock - beginning price of stock) / beginning price of stock

Percentage return

(dividends paid at end of period + change in market value over period)/ beginning market value

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

-Tbills, which had the lowest risk, had the lowest returns -small company stocks generated the highest average return -small company stocks had the highest risk level

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

-dividends -capital gains

Studying market history can reward us by demonstrating that:

-on average, investors will earn a reward for bearing risk -the greater the potential reward is, the greater the risk is

Most commonly used measures of volatility:

-variance -standard deviation

Palmer company had the following returns: 12% 10% -8% 4% 22% What is the variance?

0.0122 average return = (.12 + .10 - .08 + .04 + .22)/5 = .08 variance = ((.12-.08)^2 + (.10-.08)^2 + (-.08-.08)2) + (.04-.08)^2 + (.22-.08)^2)/(5-1) = 0.0122

Arrange the following investments from least risky to most risky:

1) US Treasury bills 2) long term corporate bonds 3) large company stocks 4) small company stocks

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 capital gains yield is _____%.

10% (55 - 50) / 50 = .10

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

16% 15% is 1 SD above the mean = (1-.68)/2 = .16

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% (19 + 13 + (-8)) / 3 = 8

Total dollar return

= income from investment (from dividends) + capital gain (loss) due to change in price

Total cash if stock sold:

=initial investment + Total return

Which of the following is commonly used to measure inflation?

The Consumer Price Index (CPI)

True of 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

Capital gain

a profit from the sale of property or of an investment. (Value of the stock now - value of stock when you bought it) * # of stock bought

The dividend yield for a 1 year period is equal to the annual dividend amount divided by the ____.

beginning stock price

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

capital gain of $6

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

compare stock returns with the returns on other securities.

Dividend

dividend per share * # of shares

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

dividends

Dividend yield

dividends per share/market price per share

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

income

Normally, the excess rate of return on risky assets is ____.

positive.

Historically, the real return on Treasury bills has been:

quite low

Sharpe ratio

risk premium of the asset / standard deviation

Variance

standard deviation squared Find the average return, then subtract the average from each return, square each of those deviations, add them, and divide by the number of returns less 1.

Capital loss

the sale of an investment for less than its purchase price (value of stock now - value of stock when you bought it) * # of stocks bought will be negative

Standard Deviation SD

the square root of the variance