Unit 4 BA 303
If you receive a $2 dividend per share on your 100 shares, your total dividend income is ____.
$2 x 100
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%
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%
The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:
2.5%
Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of ____ years.
20
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 U.S. was ______.
7.2%
If the arithmetic average return is 10% and the variance of returns is 0.05, find the approximate geometric mean.
7.5%
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%
With a normal distribution, the probability that we end up withing two standard deviations is about
95
With a normal distribution, the probability that we end up withing two standard deviations is about ____ percent
95
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
Which of the following are ways to make money by investing in stocks?
Capital gains Dividends
What two factors determine a stock's total return?
Expected return Unexpected return
True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.
False
Which of the following are examples of systematic risk?
Future rates of inflation Regulatory changes in tax rates
What is unsystematic risk?
It is a risk that affects a single asset or a small group of assets.
What is systematic risk?
It is a risk that pertains to a large number of assets.
What is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It may eventually be almost totally eliminated. It is likely to decrease.
Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926-2014 has revealed as shown in Table 10.3:
Small-company common stock Large-company common stocks Long-term corporate bonds Long-term government bonds U.S. Treasury bills
Which of the following are true based on the year-to-year returns from 1926-2014?
T-bills sometimes outperform common stocks. Common stocks frequently experience negative returns.
The Ibbotson SBBI data show that over the long-term, ___.
T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return small-company stocks had the highest risk level
Which of the following is commonly used to measure inflation?
The Consumer Price Index (CPI)
Which of the following are examples of information that may impact the risky return of a stock?
The outcome of an application currently pending with the Food and Drug Administration. The Fed's decision on interest rates at their meeting next week
Which of the following are needed to describe the distribution of stock returns?
The standard deviation of returns The mean return
Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.
U.S. Treasury Bills, Long-term corporate bonds, large-company stocks, small company stocks
______ risk is reduced as more securities are added to the portfolio
Unsystematic Company-specific Diversifiable
What will the dividend income be on W number of shares of XYZ stock if XYZ distributes a $Y per share dividend?
W x $Y
More volatility in returns produces ______ difference between the arithmetic and geometric averages.
a larger
Match each information type to the form of market efficiency that identifies that type of information as being quickly and accurately reflected in stock prices.
all information matches strong form efficiency all public information matches semi-strong form efficiency historical stock prices matches weak form efficiency
In an efficient market ______ investments have a _____ NPV.
all; zero
When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:
already knew about most of the news item
A positive capital gain on a stock results from ___.
an increase in price
Percentage returns are more convenient than dollar returns because they:
apply to any amount invested allow comparison against other investments
The dividend yield for a one-year period is equal to the annual dividend amount divided by the ____.
beginning stock price
Some important characteristics of the normal distribution are that it is:
bell-shaped symmetrical
_______ were a bright spot for U.S. investors during 2008.
bonds
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 average return on the stock market can be used to ___.
compare stock returns with the returns on other securities
The geometric average return is the average ___ 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
The appropriate discount rate to use to evaluate a new project is the _____.
cost of capital
The minimum required return on a new project is known as the:
cost of capital
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio:
declines
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
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
True or false: A well-diversified portfolio will eliminate all risks.
false
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: Discounting a news item is the same as taking the present value of that item.
false
True or false: Labor strikes are an example of systematic risk.
false
In 2008, the prices on long-term U.S. Treasury bonds
gained 40%
In 2008, the prices on long-term U.S. Treasury bonds __________ .
gained 40%
The second lesson from studying capital market history states that the _______ the potential reward, the _______ the risk
greater; greater lower; lower
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
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
An investment will have a negative NPV when its expected return is _______ ________ what the financial markets offer for the same risk.
less than
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
Systematic risk is also called ______________ risk.
market
To get the average, or ___ return, the yearly returns are summed and then divided by the number of returns.
mean
Systematic risk will ____ when securities are added to a portfolio.
not change
In the Ibbotson-Sinquefield studies, U. S. Treasury bill data is based on T-bills with a maturity of _______ month(s).
one
The year 2008 was:
one of the worst years for stock market investors in U.S. history
If you use an arithmetic average to project long-run wealth levels, your results will most likely be _______.
optimistic
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
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
The risk _____ can be interpreted as the reward for bearing risk.
premium
Historically, the real return on Treasury bills has been:
quite low
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
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.
semi-strong form
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
The _____ is the news that influences the unanticipated return on the stock.
surprise
The true risk of any investment comes from _______________ .
surprises
The true risk of any investment comes from:
surprises unanticipated events
Even if the portfolio is well diversified, the investor is still exposed to _____ risk.
systematic
Which of the following types of risk is not reduced by diversification?
systematic, or market risk
To determine the appropriate required return for an investment, we can use _____________________.
the Security Market Line
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
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: 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
Which of the following are examples of unsystematic risk?
Labor strikes Changes in management
What are the two components of risky return (U) in the total return equation?
Market risk Unsystematic risk
How are the unsystematic risks of two different companies in two different industries related?
There is no relationship.
What is the equation for total return?
Total return = Expected return + Unexpected return
An efficient market is one in which any change in available information will be reflected in the company's stock price ___.
immediately
True or false: Adding securities will reduce unsystematic risk only. Systematic risk is unaffected by diversification.
true
True or false: Labor strikes are an example of unsystematic risk.
true
The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.
well-organized
True or false: Expected return and inflation are the two components of risky return in the total return equation.
false
True or false: From 1900 to 2010, the average stock market risk premium of the U.S. was the highest of all countries.
false
True or false: Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio increases.
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: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.
false
True or false: The average return of a given period is typically not a good estimate of the returns over that same period.
false
True or false: The capital gains yield = (Pt+1 - Pt)/Dt
false
True or false: The dividend yield minus the capital gains yield is the total return percentage.
false
True or false: The geometric average rate of return measures the return in an average year over a given period.
false
True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.
false
True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.
false
True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.
false
Unsystematic risk will affect
firms in a single industry a specific firm
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on ______ types of financial investments.
five
True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.
true
True or false: The dividend yield = Dt+1/Pt
true
True or false: The normal distribution is completely described by the average and standard deviation.
true
True or false: The risk premium can be interpreted as a reward for bearing risk
true
True or false: Unsystematic risk is specific only to a single company or industry.
true
Average returns can be calculated:
two different ways
The square of the standard deviation is equal to the ____.
variance
The normal distribution is completely described by the
variance or standard deviation mean
The normal distribution is completely described by the _______ and ________.
variance or standard deviation mean