chapter 10 Flashcards
The return earned in a typical year during a multiyear period is called the __________ average return.
arithmetic
What percentage of the time should you expect to earn an annual rate of return that is within two standard deviations of the mean?
95%
A review of annualized equity risk premiums by country for the period 1900–2010 shows that
Sharpe ratios vary significantly among countries.
Which one of these statements is correct?
During the 1930s (the Great Depression), long-term government bonds produced a relatively stable rate of return relative to large-company stocks.
How did long-term U.S. Treasury bonds perform in 2008?
Increased more than 15 percent
Which one of these statements correctly reflects the period 1926–2018?
For large-company stocks, both the worst and best annual rate of return occurred during the period 1930–35.
The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the
risk premium.
Which one of the following countries had the highest average stock market risk premium for the period 1900–2010?
Italy
Based on historical performance from 1900–2010, the U.S. equity risk premium was approximately
7.2 percent.
In 2008, the S&P 500 index
declined almost 17 percent in 1 month.
Suppose a portfolio had an arithmetic average annual return of 9 percent during a 4-year period. Which one of these statements must be true regarding this portfolio for the period?
If the standard deviation of the portfolio is greater than zero, then the geometric average portfolio return is less than 9 percent.
What lesson can be learned from the 2008 market decline?
Diversification lowers risk.
You are comparing the returns of two portfolios for a 10-year period. Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II. Given this, what do you know with certainty?
Portfolio I has a lower standard deviation than Portfolio II.
The geometric average is probably best applied to __________ performance.
past
Which set of characteristics should you prefer in a stock if you desire the highest (least negative) rate of return assuming you will earn a negative total return for the period?
High-dividend, low standard deviation
The capital gains yield plus the dividend yield on a security is called the
total return.
The histogram of the returns on large-company stocks for the period 1926–2018 shows that the largest number of years had annual returns of
10 to 20 percent.
As of 2017, the United States represented about __________ percent of the total world stock market capitalization.
58
The risk premium is computed by __________ the average rate of return for an investment.
subtracting the average return on U.S. Treasury bills from
How is the Sharpe ratio defined as it applies to security returns?
Risk premium / Standard deviation
Past performance
does not guarantee future performance.
Which one of these statements correctly reflects historical history for the period 1926–2018?
U.S. Treasury bills have had a positive rate of return every single year.
Given a set of returns, the wider the distribution of those returns, the
higher the standard deviation.
Over the long-term, which one of the following is a correct statement concerning risk premium?
Stocks tend to have a higher risk premium than bonds.
For the period 1926–2018, large-company stocks had a standard deviation of
20 percent.
For the period 1926–2018, the mean return on large-company stocks is
11.9 percent.
During the period 2000–2018, which one of the following years had the lowest rate of return for the S&P 500 Index?
2008
For our historical comparison purposes, how are large-company stocks defined?
Stocks of firms included in the S&P 500 composite index
The standard deviation for a set of stock returns can be calculated as the
positive square root of the variance.
In 2008, the S&P 500 index had an annual decline of
37 percent.
During the 2008 financial crisis, the Icelandic stock exchange temporarily halted trading. What was the reaction of that market when trading resumed a few days later?
Decrease in excess of 75 percent
The average squared difference between the actual return and the average return is called the
variance
Avalanche, Inc., just declared an increase in its annual dividend from $.78 per share to $.96 per share. If the stock price should remain constant, then
the dividend yield would increase.
Given a normal distribution, assume you want to earn a rate of return that plots more than three standard deviations above the mean. What is your probability of earning such a return in any one year?
.14 percent or less
