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Finance Flashcards

Finance chapter 12

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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