Ross Chapter 12

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A portfolio is
a group of assets, such as stocks and bonds, held as a collective
unit by an investor.

The average squared difference between the actual return and

the average return is called the
variance

The standard deviation for a set of stock returns can be

calculated as the
average squared difference between the actual return and the
average return.

A symmetric, bell-shaped frequency distribution that is

completely defined by its mean and standard deviation is the
_____ distribution.
normal

The average compound return earned per year over a multi-year

period is called the _____ average return.
geometric

The return earned in an average year over a multi-year period is

called the _____ average return.
arithmetic

An efficient capital market is one in which

security prices reflect available information.

The notion that actual capital markets, such as the NYSE, are
fairly priced is called the:
Efficient Markets Hypothesis (EMH)

The hypothesis that market prices reflect all available

information of every kind is called _____ form efficiency
strong

The hypothesis that market prices reflect all publicly-available

information is called _____ form efficiency
semi-strong

The hypothesis that market prices reflect all historical

information is called _____ form efficiency
weak

The Zolo Co. just declared that they are increasing their annual
dividend from $1.00 per share to $1.25 per share. If the stock
price remains constant, then:
the dividend yield will increase

The capital gains yield plus the dividend yield on a security is

called the:
total return

The real rate of return on a stock is approximately equal to the

nominal rate of return:
minus the inflation rate

As long as the inflation rate is positive, the real rate of return on

a security investment will be ____ the nominal rate of return.
less than

The average risk premium on U.S. Treasury bills over the period
of 1926 to 2003 was _____ percent
0.0

Which one of the following is a correct statement concerning

risk premium?
The greater the volatility of returns, the greater the risk premium.

The risk premium is computed by ______ the average return

for the investment
subtracting the average return on the U.S. Treasury bill from

The excess return you earn by moving from a relatively risk-free

investment to a risky investment is called the
risk premium

To convince investors to accept greater volatility in the annual

rate of return on an investment, you must:
increase the risk premium

Which one of the following takes the shape of a bell curve?

frequency distribution

Which of the following statements are correct concerning the

variance of the annual returns on an investment
I. The larger the variance, the more the actual returns tend to
differ from the average return.
II. The larger the variance, the larger the standard deviation.
III. The larger the variance, the greater the risk of the investment.
IV. The larger the variance, the higher the expected return.

The variance of returns is computed by dividing the sum of the:

squared deviations by the number of returns minus one.

Estimates using the arithmetic average will probably tend to

_____ values over the long-term while estimates using the
geometric average will probably tend to _____ values over the
short-term.
overestimate
underestimate

In an efficient market, the price of a security will:

react immediately to new information with no further price
adjustments related to that information.

If the financial markets are efficient, then investors should

expect their investments in those markets to:
generally have zero net present values.

Which one of the following statements is correct concerning

market efficiency?
A firm will generally receive a fair price when it sells shares of
stock.

Financial markets fluctuate daily because they:

are continuously reacting to new information

Insider trading does not offer any advantages if the financial

markets are:
strong-form efficient

Individuals that continually monitor the financial markets

seeking mispriced securities:
tend to make the markets more efficient

mutual fund
an investment company that invests its shareholders' money in a
diversified portfolio of securities

drawbacks of mutual funds

transaction costs:
-management fee
-commission fee on load funds
lower than market performance:
-Consistently beating the market is difficult
-Many mutual funds just keep even with overall stock market
index

mutual funds - management co

runs funds daily ops

mutual funds - investment advisor

buys and sells stocks or bonds and oversees the investment
portfolio

mutual funds - distributor

sells the fund shares
-direct to the public
-through brokers

mutual funds - custodian

physically safeguards the securities

mutual funds - transfer agent

keeps track of purchases and redemption requests from
shareholders

open-end investment co's

investors buy and sell shares directly with the mutual fnd
company without a secondary market
have unlimited # of shares
NAV = value of all securities - liabilities total shares outstanding

closed-end investment co's

sell only after the initial offering

-subseq trades are done in a secondary mkt, similar to the
common stock market
limited number of shares
investment advisor doesn't have to worry about cash inflows or
outflows
det my supply and demand
sell at premium or discount to NAV

exchange traded funds

basket of secs designed to track a specific market index