Fin 305 Chapter 10 Learnsmart

capital gains yield formula

(ending price - beginning price) / beginning price

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

-Dividends -Capital gains

Two ways of calculating average returns are ______ and ______.

-geometric -arithmetic

The second lesson from studying capital market history states that the ______ the potential reward, the ______ the risk.

-greater;greater -lower;lower

Studying market history can reward us by demonstrating that ______.

-the greater potential reward is, the greater the risk -There is a reward for bearing risk

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 the lowest historical risk premium and ending with the highest historical risk premium.

1. Treasury Bills (least risk) 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stocks (riskiest)

If the arithmetic average return is 10% and the variance of returns is .05, find the approximate geometric mean.

7.5% reasons .10-.05/2 or .075 7.5%

The _____________price index is a commonly used measure of inflation.

Consumer

Historically, there is a(n) ______ relationship between risk and expected return in the financial markets.

Direct

The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.

Excess

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

False:

weak form efficiency

Market prices reflect all historical information

strong form efficiency

Market prices reflect all information, both public and private

If you use a geometric average to project short-run wealth levels, your results will most likely be ______.

Pessimistic

Historically, the real return on Treasury bills has been ______.

Quite low

To get the average return

The yearly returns are summed and then divided by the number of returns

semistrong form efficiency

current prices reflect all available public information includes information like financial statements, news, analysts opinions

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

dividends

The Dividend Yield formula

dividends per share/market price per share

True or false: The geometric average rate of return measures the return in an average year over a given period.

false

The second lesson from studying capital market history is that risk is ______.

handsomely rewarded

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

higher

If you use an arithmetic average to project long-run wealth levels, your results will most likely be ______.

optimistic

Normally, the excess rate of return is ______.

positive

The arithmetic average rate of return measures the ______.

return in an average year over a given period

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.

semistrong form

The geometric average rate of return is approximately equal to ______.

the arithmetic mean minus half of the variance

Which of the following is commonly used to measure inflation?

the consumer price index (CPI)

Average returns can be calculated ______.

two different ways