FIN 305: Chapter 10
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 probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:
2.5%
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
If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______. Multiple choice question.
optimistic
The standard deviation is the ______ of the variance.
square root
Treasury Bills yielded a nominal average return over 86 years of 3.5% versus an average inflation rate of 3.0% over the same period. This makes the real return on T-bills approximately equal to _____.
0.5%
Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.
1: US 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
Which of the following are ways to make money by investing in stocks?
Capital gains Dividends
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.
To get the average, or ______ average , return, the yearly returns are summed and then divided by the number of returns.
Mean
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
T/F: The arithmetic average rate of return measures the return in an average year over a given period.
True
T/F: The capital gains yield = (Pt+1 - Pt)/Pt
True
T/F: The dividend yield = Dt+1/Pt
True
In an efficient market ______ investments have a _____ NPV.
all; zero
Some important characteristics of the normal distribution are that it is:
bell-shaped symmetrical
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
The risk-return relationship states that a riskier investment should demand a ____________ return.
higher
An efficient market is one in which any change in available information will be reflected in the company's stock price ___.
immediately
An efficient market is one that fully reflects all available ______.
information
Stock prices fluctuate from day to day because of:
information flow
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____.
is highly risky
The normal distribution is completely described by the _______ and ________.
mean variance or standard deviation
The arithmetic average rate of return measures the ____.
return in an average year over a given period
Two ways of calculating average returns are _______ and _______.
the arithmetic average the geometric average
The geometric average rate of return is approximately equal to ___.
the arithmetic mean minus half of the variance
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
The square of the standard deviation is equal to the ____.
variance
The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.
well-organized
If you use a geometric average to project short-run wealth levels, your results will most likely be _______ .
pessimistic
Normally, the excess rate of return is ___.
positive
Historically, the real return on Treasury bills has been:
quite low
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
Multiple Select QuestionYour Answer incorrect ErrorBefore moving on, you must review a resource for this question. The Ibbotson SBBI data show that over the long-term, ___.
small-company stocks generated the highest average return T-bills, which had the lowest risk, generated the lowest return small-company stocks had the highest risk level
Geometric averages are usually ______ arithmetic averages. Multiple choice question.
smaller than
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
