Chapter 10: some lessons from capital market history

Question 1

Dollar and Percent Returns

Answer 1

Total Dollar Return= the return on investment measured in dollars
$ Return=dividends +capital gains
-capital gains= price received-price paid
%return= $return/$invested

Question 2

Percent Return

Answer 2

Dividend yield= (Dt+1)/ Pt
Capital Gains Yield= [(Pt+1)-Pt]/Pt
% return= DY+CGY
% return= (Dt+1) +(Pt+1)- Pt/Pt

Question 3

Risk Free Rate

Answer 3

rj=rf+b(rm-rf)

Question 4

Risk Premium

Answer 4

rj=rf + b(rm)

Question 5

Variance: VAR(R)

Answer 5

the average of the squared differences from the mean

Question 6

Standard Deviation: SD(R)

Answer 6

square root of the variance

Question 7

Efficient Capital Market

Answer 7

Hypothesis:

• stock prices are in equilibrium
• stocks are “fairly” priced

Question 8

Strong-Form Efficient Market

Answer 8

• prices reflect all information, including PUBLIC AND PRIVATE
• investors earn abnormal return
• markets are NOT strong form efficient

Question 9

Semistrong-Form efficient Market

Answer 9

• prices reflect all PUBLICLY AVAILABLE info
• investors can’t earn abnormal returns by trading on public info
• fundamental analysis WONT lead to abnormal returns

Question 10

Weak-form Efficient Market

Answer 10

• prices reflect all PAST MARKET info
• investors CAN’T earn abnormal returns by trading on market info
• implies that technical analysis will NOT lead to abnormal returns
• markets are generally WEAK