Chapter 12: Some Lessons from Capital Market History

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

$200

If you buy 100 shares of ABC stock at $5 per share, your total investment is _______.

$500

In the Ibbotson-Sinquefield studies, long-term corporate bonds have which of the following characteristics: Government issuers, 20-year maturities, 10-year maturities, High quality

*20-year maturities *High quality

Which of the following are true?

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

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

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

If the risk premium of stock JKL is 5% while the standard deviation is 10% , then the Sharpe ratio equals ______

.50

Look at the frequency distribution in figure 12.9 and rank the following ranges of stock returns in order from highest to lowest frequency: 10%-20%, 0-10%, 20%-30%, -10% to 0

1. 10%-20% 2. 20%-30% 3. 0-10% 4. -10% to 0

Palmer Company had the following returns: 2013: 12% 2014: 10% 2015: -8% 2016: 4% 2017: 22% What is the standard deviation of Palmer's returns?

11.04% (((0.12-0.08)^2+(0.1-0.8)^2+(-0.08-0.08)^2+(0.04-0.08)^2+(0.22-0.08)^2)/(5-1))^0.8 = 11.04%

A share of common stock currently sells for $100 and will pay a dividend of $2 at the end of the year. If the price is expected to increase to $113 at the end of one year, what's the stock's current dividend yield?

2% ($2/$100)

What is the arithmetic average return for a mutual fund that reported a return of 5% every year for the last 3 years?

5%

If the annual stock market returns for Berry Company were 19%, 13%, and -8%, what was the arithmetic mean for those 3 years?

8%

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

Beginning stock price

If you are forecasting a few decades in the future (like a retirement plan) you should calculate the expected return using:

Blume's formula

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

Compare stock returns with the returns on other securities

A commonly used tool to measure inflation?

Consumer Price Index (CPI)

Which one of the following are ways to make money by investing in stocks: dividends, amortization, capital gains, interest

Dividends and capital gains

An efficient market is one in which any change in available info will be reflected in the company's stock price _______

Immediately

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

Average returns can be calculated:

Two different ways: geometric average or arithmetic average

The square of the standard deviation is equal to the _____

Variance

A distribution tends to have a smooth shape when the number of observations is _______.

Very large

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

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

A capital gain on a stock results from _____

an increase in stock price

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

capital gain of $6

Variance is measured in ______, while standard deviation is measured in ______.

percent squared; percent

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

Arrange the following investments in ascending order from the lowest historical risk premium at the top to highest historical risk premium at the bottom: Large-company stocks, Small-company stocks, Long-term corporate bonds, US Treasury bonds

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

Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums: US Treasury bills, Small-company common stock, Long-term corporate bonds

1. US Treasury bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company common stock

The probability of an outcome being two standard deviations below the mean in a normal distribution is approximately ______ percent

2.5

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)/$100} + (1)/$100 = 14%+1% = 15%