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# 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