WEEK 8 Flashcards by Kristine Zakoyan

Studying stock market history can help us in investment decisions as it shows that

the greater the potential reward is, the greater the risk.

there is a reward for bearing risk.

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The two potential ways to make money as a stockholder are through ______ and capital appreciation.

dividends

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Dividends are the ______ component of the total return from investing in a stock.

income

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A capital gain on a share results from _____

an increase in stock price

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If you buy 100 shares of ABC stock at €5 per share, your total investment is ______.

500

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Which of the following are ways to make money by investing in stocks? (Select all that apply.)

Capital gains

Dividends

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If you receive a €2 dividend per share on your 100 shares, your total dividend income is ______.

100

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When a company declares a dividend, shareholders generally receive ______

cash

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If you buy a stock for €10 and later sell it for €16, you will have a ______.

capital gain of €6

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The price of XYZ stock rises from £10 to £15. If you own 100 shares, your capital gain is ______.

(£15 - 10) x 100 = £500

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How many shares in BP would you have to purchase for the total investment to be £1,400 if BP is trading at £35.

£1,400/35 = 40

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What will the dividend income be on 1,000 shares of XYZ stock if XYZ distributes a €0.20 per share dividend?

€0.20 x 1,000 = €200

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What will your capital gain be if you hold 40 shares of BP stock and the stock price rises from £27 to £40 a share?

40 x (£40 - 27) = £520

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The total monetary return on a stock is the sum of the ______ and capital gains/loss.

dividend income

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If your total monetary return was £7 and your dividend was £2, then the price change on your stock must have been ______.

7 - 2 = 5

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What is the maximum capital loss that you can incur if you bought 200 shares of TP plc for £32?

£6,400

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How much cash would an investor make when selling equity if the initial investment is £4,450 and the total monetary return is £335?

£4,450 + £335 = £4,785

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True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock.

true
An unrealized gain is treated the same as a realized gain when computing the total return.

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Your total year-end value from a one-year investment equals the initial investment plus the total monetary return. It also equals the ______.

proceeds from the stock sale plus dividends

: In fact the year end value includes the proceeds from the sales plus all dividends received.

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Which of the following is the correct way to calculate the total monetary return?

total monetary return = Dividend income + Capital gains

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You bought one share of stock for €100 and received a €2 dividend. If the price of the stock rose to €103, then your total monetary return would be ______.

€103 - 100 + 2 = €5

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The total cash when equity is sold is calculated as

Initial investment + Total monetary return

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Suppose you buy a share of stock for €100. One year hence, the stock price is €114 and a €1 dividend is paid. If you do not sell the stock, your total annual return is ______.

Reason: (€114−100+1)/€100
= 15%

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Percentage returns are more convenient than monetary returns because they _____

apply to any amount invested

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The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ______.

initial stock price

You buy a stock for €50. After one year, its price rises to €55, and it pays a €2 dividend. You do not sell the stock. Your capital gains yield is ______.

Reason: (€55−50)/€50 = 10%

CAC40

France

DAX30

germany

S&P500

FTSE10

The denominator in the dividend yield formula is

the share price at time t.

The change in the price of shares divided by the initial price calculates ______.

the capital gain or loss

A share of common stock currently sells for £100 and will pay a dividend of £2 at the end of the year. If the price is expected to increase to £113 at the end of one year, what is the stock's current dividend yield?

Reason: £2/£100 = 2%

The formula for the calculation of the Holding Period Return (HPR) assumes that dividends

are reinvested each year.

The 2-year holding period return of an investment would include

the reinvestment of all dividends.

If the annual stock returns for Santander Group are 12%, 4%, -5% and 7% for years 1 to 4 respectively, what is the 4-year holding period return?

Reason: HPR = (1 + 0.12) x (1 + 0.04) x (1 - 0.05) x (1 + 0.07) - 1 = 0.184 = 18.4%

The average return best describes ______

past returns

The measure that shows what the worth of the investment would have been if the money that was initially invested had been left in the stock market, and if each year the dividends from the previous years had been reinvested in more shares is

the holding period return. as it looks at the initial investment and also all previous dividends being reinvested.

Within a returns frequency distribution, the height of the graph gives the

number of sample observations in the range on the horizontal

The annual returns on RBS shares between 2010 and 2012 are 33.80%, -48.35% and 65.41% respectively. What is the average arithmetic return on RBS shares over these three years?

Reason: R = (0.3380−0.4835+0.6541)/3 = 0.1695 = 16.95%

Governments borrow money by issuing

bonds

A typical bill is a pure ______ bond that will mature in a year or less.

discount

To compute the average annual return for a given number of years we need to add up all annual returns and ______ the total number of observations (years).

divide

The holding period return earned on a stock market investment over multiple years includes the return from reinvesting Blank______ earned during the period.

Dividends are earned on stocks, so the holding period return earned over multiple years includes the return from reinvesting dividends.

Government debt is virtually free of the risk of default because:

governments can raise taxes to pay off their debt

The excess return on the risky asset is also interpreted as

the equity risk premium.

Historically, the average long-term stock market return in most European countries has been higher than the ______ return.

risk-free

Treasury bills are one form of

government bonds.

The standard deviation of T-bills is

less than/to that of equities.

When we consider the spread of shares' returns over a period, we consider

the return risk on the company's share.

The most common measures of variability (or dispersion) are

variance. standard deviation.

A very spread out distribution of returns is indicative of a ______ equity.

high-risk

The measure of how much a particular return can deviate from the mean return is called ______.

the spread of a distribution

The difference between risky returns and the risk-free return is called the _____

This would be the excess return on the risky asset.

A very spread out distribution of returns is indicative of a ______ equity.

high-risk

What shape of curve would a large enough sample drawn from a normal distribution produce?

bell shaped

The geometric rate of return takes ______ into account.

compounding

An equity's risk can be measured by the

distribution of its returns over a given time period

The normal distribution is ______ about its mean.

symmetric

geometric average return formula steps

1) take each fo the T annaul returs and add 1 to each 2) multiply all numbers together 3) take teh resuls and raise to the power 1 over T 4) Subtract 1 from the previous result

What is the arithmetic average return for a stock that had annual returns of 8%, 2% and 11% for the past 3 years?

Reason: Arithmetic average = (8%+2%+11%)/3 = 7%.

If a stock has annual returns of 10% and 20% over 2 years, the geometric average rate of return can be calculated by ______.

[(1.10)(1.20)]0.5 - 1

The arithmetic average rate of return measures the Blank______.

return in an average year over a given period

Given that the returns of a firm are normally distributed, what is the probability of having a return within one standard deviation of the mean?

68%

Blume's formula combines ______

the arithmetic average return and the geometric average return

Which of the following can give a value that is too high when longer periods are under consideration?

Arithmetic Average Return

if we start with a €1 investment and its value after four years is €1.50, then the geometric average return is ______.

1.5^1/4 - 1 = -0.1067 = 10.67%

The expected return, based on an individual's expectation, may be the average return per period a security

has earned in the past.

the statistic measuring the interrelationship between two securities is called ___

the covariance

A company with a standard deviation of 3.346% would have a variance of

3.346%^2 = 11.19%

If the stated value of a preference share is €100 and offers a '€5 preferred' dividend, what is the dividend yield?

€5/€100 = 5%

When calculating the variance, we square the difference between actual and expected return to ______.

make it positive

Firms have an incentive to delay paying preferred dividends because ______.

no interest is paid on cumulated dividends

An equity characteristic of preference shares is that the payment of dividends is not ______.

obligatory Being considered equity, preference shares' dividends are not considered obligatory.

"Stated liquidating value" is a nominal value, usually £100 pr share, that is applied to ______.

preference shares

When dividends payable on preference shares are cumulative but have not been paid for the last couple of years, ordinary shareholders will be paid ______.

only when both the cumulated and the current preference share dividends have been paid

A debt characteristic of preference shares is when contractual ______ are made until a pre-specified future date.

dividend payments

WEEK 8 Flashcards

(78 cards)