LS 10: Some Lessons from Capital Market History
If the arithmetic average return is 10% and the variance of returns is 0.05, find the approximate geometric mean.
0.10 - 0.05/2 = 0.075 or 7.5%
1. True or false: A capital loss is the same thing as a negative capital gain.
1. True
A dividend yield of 10% says that, for each dollar we invest, we get _______ cents in dividends.
10
The arithmetic mean for large-company stock returns from 1926 to 2017 is:
12.1%
The standard deviation for large-company stock returns from 1926 to 2017 is:
19.8%
2. True or false: The dividend yield = Dt+1/Pt
2. True
The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:
2.5%
3. True or false: The capital gains yield = (Pt+1 - Pt)/Dt
3. False
4. True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.
4. False
5. True or false: The dividend yield minus the capital gains yield is the total return percentage.
5. False
6. True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.
6.False
The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately ___ percent.
68
7. True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.
7. False
8. True or false: The geometric average rate of return measures the return in an average year over a given period.
8. False
9. True or false: The geometric average rate of return measures the return in an average year over a given period.
9. False
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
In an efficient market ______ investments have a _____ NPV.
all; zero
A positive capital gain on a stock results from ___.
an increase in price
The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____.
beginning stock price
The percentage change in the price of a stock over a period of time is called its ___________.
capital gain yield
The total dollar return is the sum of dividends and __________.
capital gains or losses
When a company declares a dividend, shareholders generally receive ____.
cash
The total return percentage is the __________yield plus the capital gains yield.
dividend
The total return percentage is the _________yield plus the capital gains yield.
dividend
The total return percentage is the________ yield plus the capital gains yield.
dividend
The two potential ways to make money as a stockholder are through _______ and capital appreciation.
dividends
Which of the following are ways to make money by investing in stocks?
dividends capital gains
The total dollar return on a stock is the sum of the ____ and the _____.
dividends; capital gains
The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.
excess
In an efficient market, firms should expect to receive ______ value for securities they sell.
fair
An efficient market is one in which any change in available information will be reflected in the company's stock price ___.
immediately
Dividends are the ______ component of the total return from investing in a stock.
income
An efficient market is one that fully reflects all available ______.
information
Stock prices fluctuate from day to day because of:
information flow
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
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____.
is highly risky
To get the average, or _________return, the yearly returns are summed and then divided by the number of returns.
mean
The normal distribution is completely described by the _______ and ________.
mean variance or standard deviation
If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______.
optimistic
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
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
semi-strong form
Geometric averages are usually ______ arithmetic averages.
smaller than
The standard deviation is the ______ of the variance.
square root
Some important characteristics of the normal distribution are that it is:
symmetrical bell-shaped
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
Average returns can be calculated:
two different ways
The square of the standard deviation is equal to the ____.
variance
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
The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.
well-organized
If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?
An efficient market reaction
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 _____.
3.5%-3.0%=0.5%
