Test 3

Question 1

The greater the risk, the greater the

Answer 1

expected return

Question 2

Total dollar return

Answer 2

income from investments + capital gain (or loss) due to change in price

Question 3

Dividend Yield

Answer 3

income/beginning price

Question 4

capital gains yield

Answer 4

(ending price-beginning price)/ beginning price

Question 5

total percentage return

Answer 5

dividends yield + total percentage

Question 6

Financial markets allow companies, government, and individuals to increase

Answer 6

unity/wealth

Question 7

treasury bills are considered to be

Answer 7

risk free

Question 8

risk premium

Answer 8

return over and above the risk-free rate

Question 9

variance and standard deviation measure the ____ of asset returns

Answer 9

volatility

Question 10

the greater the volatility the greater the

Answer 10

uncertainty

Question 11

use variance and standard deviation to measure

Answer 11

risk

Question 12

historical variance

Answer 12

sum of squared deviations from the mean / (number of observations - 1)

Question 13

standard deviation

Answer 13

square root of variance

Question 14

the arithmetic average is

Answer 14

overly optimistic for long horizons, return earned in an average period over multiple periods

Question 15

the geometric average is

Answer 15

overly pessimistic for short horizons, average compound return per period over multiple period

Question 16

Geometric or average? 15-20 years

Answer 16

arithmetic

Question 17

Geometric or average? 20-40 years

Answer 17

split the difference between the 2

Question 18

Geometric or average? 40+ years

Answer 18

geometric

Question 19

if the market is perfect, then it should be

Answer 19

efficient

Question 20

an efficient market is where stock prices are

Answer 20

in equilibrium or fairly priced, should not be able to earn excess returns

Question 21

prices should reflect

Answer 21

all public information

Question 22

strong form efficiency

Answer 22

prices reflect all information, both private and public

• investors could not earn abnormal returns regardless of the information they had (bc the prices are supposed to take all information into account)
• our markets are NOT strong form efficient (private information is not known and can be used to get ahead, illegal, inside trading)

Question 23

semi-strong efficiency

Answer 23

prices reflect all public information including trading information, annual reports, press releases ect
-investors could not earn abnormal returns on public information

Question 24

weak form efficient

Answer 24

prices reflect all past market information, such as prive and volume

• investors cannot earn abnormal returns by trading on market information
• markets are generally weak form efficient

Question 25

efficient market do not mean that ____. They do mean that you will earn a return that is ___________

Answer 25

you cant make money, appropriate for the risk undertaken

Question 26

expected returns are based on

Answer 26

the probability of possible outcomes

Question 27

portfolio

Answer 27

a collection of assets