CH 12 FIN

volatility

standard deviation is a measure of

normal distribution

defined by its mean and its standard deviation

geometric

the average compound return earned per year over a multi-year period is the - average return

arithmetic

the return earned in an average year over a multi-year period is called the - average return

efficient capital market

assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. which one of the following terms best defines that market?
risk less market
evenly distributed market
z

Efficient market hypothesis

all securities in this market are zero at nvp investments

dividend yield

next years annual dividend divided by todays stock price

capital gains

an increase in an unrealized capital gain will increase the capital gains yield

I & III

correct in relation to a sock investment
I capital gains yield can be positive, negative, or zero
II dividend yield can be positive, negative, or zero
III total return can be positive, negative, or zero
IV neither the dividend yield nor the total return c

minus the inflation rate

the real rate of return on a stock is approximately equal to the nominal rate of return:

less than

as long as the inflation rate is positive, the real rate of return on a security will be - the nominal rate of return
greater than
equal to
less than
greater than or equal to
unrelated to

c

small-co stocks are best defined as
a 500 newest corporations in the US
b firms whose stock trades otc
c smallest 20% of the firms listed on the NYSE
d smallest 20% of the firms listed on the NASDAQ
e firms whose stock is listed on NASDAQ

small company stocks

which category of securities had the highest average return for 1926-2007

US t bills

had the lowest average risk premium in 26-07

small company stocks

most volatile returns over 26-07

us t bills

- - - had a positive average real rate of return in 1926-2007

c

which time periods are associated with high rates of inflation
a 1929-1933
b 1957-1961
c 1978-1981
d 1992-1996
e 2001-2005

positive

US t bills during 1926-2007, the annual rate of return was always -

10-15%

highest annual rate of inflation in 1926-2007
between 0-3%
3-5%
5-10%
10-15%
15-20%

excess return

this is computed as return on a risky security minus the risk free rate

small company stocks

earned the highest risk premium 1926-2007

3.0-3.5

average rate of inflation between 1926-2007
< 2%
2.0-2.5
2.5-3.0
3.0-3.5
> 3.5%

10-12.5%

assume that you invest in a porfolio of large company stocks. further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for 1926-2007. what rate of return should you expect to earn?
< 10%
10-12.5%
1

5

the average annual return on small-company stocks was about - % greater than the average annual return on large-company stocks 0ver 1926-2007

US t bills

lease volatile from 1926-2007

the greater the risk premium

the greater the volatility of returns,

III & IV

correspond to a wide frequency distribution
I relatively low risk
II low rate of return
III relatively high standard deviation
IV relatively large risk premium

increase the risk premium

to convince investors to accept greater volatility you must,

II & III

if the variability of the returns on large compnay stocks were to increase over the long-term, you would expect which of the following to occur as a result?
I dec in the average rate of return
II increase in the risk premium
III increase in the 68% probab

lower return, long term

long term government bonds had a - - but a higher standard deviation on average than did - corporate bonds

16%

probability that small-company stocks wil produce an annual return that is more then one standard deviation below the average
1%
2.5%
5.0%
16%
32%

6.8%

according to jeremy siegel, the real return on stocks over the long-term has averaged about:
6.8%
8.7%
10.4%
12.3%
14.8%

IV

which is true based on the historical record for 1926-2007
I risk and potential reward are inversely related
II risk free securities produce a positive real rate of return each year
III returns are more predictable over the short-term than they are over t

overestimate, underestimate

estimates of the rate of return on a security based on a historical artihmetic average will probably tend to - the expexted return for the long-term while estimates using the historical geometric average will probably tend to - the expected return for the

project future rates of return

the primary purpose of blumes formula is to

III & IV

which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released?
I insiders know the info prior to the announcement
II investors need time to digest th

weak

if you excel in analyzing the future outlook of firms, you would prefer the financial market be- form efficient so that you can have an advantage in the marketplace

semistrong

you are aware that your neighbor trades stocks based on confidential info he overhears at his workplace. this information is not available to the general public. this neighbor continually brags to you about the profits he earns on these trades. given this

stong

th us securities and exchange commission periodically charges infividuals with insider trading and claims those individuals have made unfair profits. given this you would be most apt to argure that the markets are less than - form efficient
weak
semiweak

-3.96

one year ago, you purchase a stock at price of $32.16. the stock pays quarterly dividends of $.20 per share. today, the stock is selling for $28.20 per share. what is your capital gain on this investment?
-4.16
-3.96
-3.76
-3.16
-2.96