FIN 3113 Chapter 12 – Flashcards
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Studying market history can reward us by demonstrating that:
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the greater the potential reward is, the greater the risk & there is a reward for bearing risk.
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Dividends are the _______ component of the total return from investing in a stock.
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Income
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A capital gain on a stock results from ______
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an increase in stock price
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Dividend yield for a one-year period is equal to the annual dividend amount divided by the ____
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beginning stock price
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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 ________.
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initial stock price
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Historically, the real return on Treasury bills has been:
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quite low
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The average return on the stock market can be used to ______.
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compare stock returns with the returns on other securities.
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Lowest historical risk premium to highest historical risk premium
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US Treasury Bills, Long term corporate bonds, large company stocks, small company stocks
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The _______ rate of return is the difference between risky returns and risk free returns.
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excess
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Mona Corporation has a variance of returns of 343, while Scott Company has a variance of returns of 898. Which company's actual returns vary more from their mean return?
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Scott Corporation
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The standard deviation is the _______ of the variance.
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square root
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Variance is measure in ______, while standard deviation is measured in _____.
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percent squared, percent
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The second lesson from studying capital market history is that risk is:
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handsomely rewarded
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The year 2008 was:
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one of the worst years for stock market investors in US history
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A distribution tends to have a smooth shape when the number of observations is _________.
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very large
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A normal distribution has a _____ shape
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symmetrical
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The probability of an outcome being 2 standard deviations below the mean in a normal distribution is approximately _______ percent.
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2.5
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Normally, the excess rate of return is _____.
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positive
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Probability of an outcome being within one standard deviation of the mean in a normal distribution is approximately ____ percent.
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68
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The excess return on a risky asset is the difference between the risky return and the _____ rate
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risk-free
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Probability of an outcome being within 2 standard deviations of the mean in a normal distribution is approximately ____ percent
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95
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The Ibbotson-Sinquefield data shows that _______.
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Long term corporate bonds had less risk or variability than stocks & US T-bills had the lowest risk or variability.
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Highest to lowest return based on what our study of capital market history has revealed about risk premiums.
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Small company common stock, long term corporate bonds, US Treasury bills
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Ways to make money by investing in stocks:
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Dividends and capital gains
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The Ibbotson-Sinquefield data show that over the long term, _____________.
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T-bills, which had the lowest risk, generated the lowest return; small-company stocks had the highest risk level; and small-company stocks generated the highest average return
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2 potential ways to make money as a stockholder are through ______ and capital appreciation
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dividends
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When dealing with the history of capital market returns, an average stock market return is useful because it ______.
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simplifies detailed market data & is the best estimate of any one year's stock market return during the specified period.
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The Ibbotson-Sinquefield data presents rates of return from 1925 to recent times for:
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Large company stocks & long term US gov bonds.
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Arithmetic average rate of return measures the ________.
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return in an average year over a given period
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The rates of return in the Ibbotson-Sinquefield studies are not adjusted for which of the following?
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Inflation & Taxes
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Geometric averages are _____ arithmetic averages.
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smaller than
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The Ibbotson-Sinquefield data presents returns from 1925 to the recent past for:
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US T-Bills, large cap stocks and small cap stocks
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Highest to lowest return based on what our study of capital market history has revealed about risk premiums
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Small company common stock, long term corporate bonds, US Treasury bills
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In the Ibbotson-Sinquefield studies, long term corporate bonds have which of the following characteristics?
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20 year maturities & high quality
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Commonly used to measure inflation
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The Consumer Price Index (CPI)
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Which are true about the historical equity risk premiums of the countries studied by Dimson, Marsh and Staunton?
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Italy had the highest equity risk premium, and Denmark had the lowest equity risk premium.
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The total dollar return on a stock is the sum of the ______ and the _____.
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Dividends and capital gains
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If you are forecasting a few decades in the future you should calculate the expected return using:
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Blume's formula
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Average returns can be calculated by:
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arithmetic and geometric
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The Treasury bills used in the Ibbotson-Sinquefield studies had maturities of _____.
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1 month
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Percentage returns are more convenient than dollar returns because they ______.
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Apply to any amount invested.
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The Sharpe ratio measures:
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reward to risk
