FIN 3113 Chapter 12

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

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