Managerial Finance Ch.10
If you receive a $2 dividend per share on your 100 shares, your total dividend income is ______
$2 × 100
Which of the following are needed to describe the distribution of stock returns?
-The mean return -The standard deviation of returns
A dividend yield of 10 percent says that, for each dollar we invest, we get ______ cents in dividends
10
More volatility in returns produces ________ difference between the arithmetic and geometric averages
A larger
In an efficient market ______ investments have a _______ NPV
All; zero
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
The two potential ways to make money as a stockholder are through ______ and capital appreciation
Dividends
True or false: The smaller the variance or standard deviation is, the more spread out the returns will be
False
An unrealized gain is treated the same as a realized gain when computing the total _______
Return
The arithmetic average rate of return measures the ______
Return in an average year over a given period
True or 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
True or false: A capital loss is the same thing as a negative capital gain
True
True or false: The dividend yield = Dt+1/Pt
True
The efficient markets hypothesis contends that ______ capital markets such as the NYSE are efficient
Well-organized
Percentage returns are more convenient than dollar returns because they _____
-Allow comparison against other investments -Apply to any amount invested
Some important characteristics of the normal distribution are that it is ________
-Bell-shaped -Symmetrical
Which of the following are ways to make money by investing in stocks?
-Capital gains -Dividends
The standard deviation for large-company stock returns from 1926 to 2021 is ______
19.7%
Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ______ years
20
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on ________ types of financial investments
5
The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately _______ percent
68
From 1900 to 2010, the average stock market risk premium of the United States was _______
7.2%
If the arithmetic average return is 10% and the variance of returns is .05, find the approximate geometric mean
7.5% Reason: 0.10 - 0.05/2 = 0.075 or 7.5%
The geometric average return is the average _______ (compound/simple) return earned per year over a multiyear period
Compound
The geometric rate of return takes _____ into account
Compounding
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 total return percentage is the _____ yield plus the capital gains yield
Dividend
In an efficient market, firms should expect to receive _____ value for securities they sell
Fair
True or false: Arithmetic and geometric averages are useful because they are not influenced by volatility
False
True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks
False
True or false: From 1900 to 2010, the average stock market risk premium of the United States was the highest of all countries
False
True or false: In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of one year
False
True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity
False
True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested
False
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
Historically, the real return on Treasury bills has been ______
Quite low
All information
Strong form efficiency
Which of the following is commonly used to measure inflation?
The consumer price index (CPI)
True or false: The normal distribution is completely described by the average and standard deviation
True
Average returns can be calculated _______
Two different ways
The square of the standard deviation is equal to the ______
Variance
What will the dividend income be on W number of shares of XYZ stock if XYZ distributes a $Y per share dividend?
W × $Y
Historical stock prices
Weak form efficiency
The risk _____ can be interpreted as the reward for bearing risk
Premium
The risk-return relationship states that a riskier investment should demand a ______ return
Higher
True or false: The dividend yield minus the capital gains yield is the total return percentage
False
With a normal distribution, the probability that we end up within two standard deviations is about ___ %
95
If you use a geometric average to project short-run wealth levels, your results will most likely be ______
Pessimistic
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
Which of the following are true based on the year-to-year returns from 1926 to 2021?
-T-bills sometimes outperform common stocks -Common stocks frequently experience negative returns
Two ways of calculating average returns are _____ and ______
-The geometric average -The arithmetic average
In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of _______ month(s)
One
If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______
Optimistic
Geometric averages are usually _______ arithmetic averages
Smaller than Reason: Geometric averages are usually smaller than arithmetic averages because of the effect of compounding
The second lesson from studying capital market history states that the ______ the potential reward, the ______ the risk
-Greater; greater -Lower; lower
The Ibbotson-Sinquefield data show that ______
-Long-term corporate bonds had less risk or variability than stocks -U.S. T-bills had the lowest risk or variability
The normal distribution is completely described by the ______ and _______
-Mean -Variance or standard deviation
Some important characteristics of the normal distribution are that it is _______
-Symmetrical -Bell-shaped
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
Treasury bills yielded a nominal average return over 95 years of 3.3% versus an average inflation rate of 2.9% over the same period. This makes the real return on Treasury bills approximately equal to _____
.4%
Arrange the following investments starting from lowest historical risk premium to highest historical risk premium
1. U.S. Treasury Bills 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stocks
Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926 to 2014 has revealed as shown in Table 10.3
1. small-company common stock 2. large-company common stocks 3. Long-term corporate bonds 4. Long-term government bonds 5. U.S. Treasury bills
The arithmetic mean for large-company stock returns from 1926 to 2021 is _________
12.2%
The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:
2.5%
In 2008, the S&P 500 plunged ______
37%
2008 was a bad year for markets worldwide. One of the worst hit was the Icelandic Exchange where shares priced dropped _______ in one day
76%
A positive capital gain on a stock results from _____
An increase in price
To compute the _______ return, the yearly returns are summed and then divided by the number of returns
Average
_______ were a bright spot for U.S. investors during 2008
Bonds
The total dollar return is the sum of dividends and ______
Capital gains or losses
True or false: The average return of a given period is typically not a good estimate of the returns over that same period
False
In 2008, the prices on long-term U.S. Treasury bonds ______
Gained 40%
The second lesson from studying capital market history is that risk is The second lesson from studying capital market history is that risk is ________
Handsomely rewarded
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ______
Is highly risky
Normally, the excess rate of return is _____
Positive
The excess return is the difference between the rate of return on a risky asset and the ______ rate
Risk-free
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
All public information
Semistrong form efficiency
True or false: Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets
True
True or false: The risk premium can be interpreted as a reward for bearing risk
True
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
When a company declares a dividend, shareholders generally receive _________
Cash
The average return on the stock market can be used to ______
Compare stock returns with the returns on other securities
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
True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns
False
True or false: The geometric average rate of return measures the return in an average year over a given period
False Reason: The arithmetic average rate of return measures the return in an average year over a given period
True or false: The capital gains yield = (Pt+1 − Pt)/Dt.
False Reason: The capital gains yield = (Pt+1 - Pt)/Pt
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
Using capital market history as a guide, it would appear the greatest reward would come from investing in _______
Small-company common stock
The standard deviation is the ______ of the variance
Square root
The variance and its square root, the ________ , are the most commonly used measures of volatility
Standard deviation