Total Dollar Return | Income from investment + Capital Gain (loss) due to change in stock priceex: Stock price $37 beginning of year and $40.33 end of year, 100 shares, $1.85/dividendscapital gain (40.33 – 37) x 100 = $333; total dollar return= $185 + $333 = $518 |

Total Percentage Returns | = Dividends paid at the end of the period (income from investment) + Capital Gains / beginning price of stockex: dividend yield= $1.85/37= 5% capital gains= ($40.33-37)/37= 9% (Pt+1 – Pt)/ Ptpercentage return= $0.14 on the dollar invested |

Risk Premium | The excess return required from an investment in a risky asset over that required from a risk-free investment |

Variance of an investments annual return | The average squared difference between the actual returns and the arithmetic average return |

Standard Deviation | The measure of volatility; positive square root of the variance |

Normal Distribution | Defined by its mean and standard deviation |

Efficient Capital Market | Market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. |

Dividend Yield | Next year’s annual dividend / today’s stock price |

Small company stocks | Smallest twenty percent of the firms listed on the NYSE |

Which one of the following best defines the variance of an investment’s annual returns over a number of years? | The average squared difference between the actual returns and the arithmetic average return |

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? | Risk Premium |

Standard deviation is a measure of which one of the following? | Volatility |

Which one of the following is defined by its mean and its standard deviation? | Normal distribution |

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? | Efficient capital market |

Which one of the following correctly describes the dividend yield? | next year’s annual dividend / by today’s stock price |

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return | Less than |

Small-company stocks, as the term is used in the textbook, are best defined as the: | smallest twenty percent of the firms listed on the NYSE |

Which one of the following categories of securities had the highest average return since 1926? | Small-company stocks |

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2007? | U.S Treasury bills |

Efficient Capital Market | Current market prices fully reflect available information |

3 forms of Market Efficiency | – Weak: Prices reflect all past (historical) market information such as price and volume- Semi-strong: all public information is reflected in the stock price (annual reports and press releases)- Strong: all information of every kind is reflected in stock prices* Abnormal returns cannot be earned |

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