Term
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Definition
| income from investment + capital gain (loss) due to change in price |
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Term
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Definition
| the greater the risk, the greater the potential reward |
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Term
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Definition
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Term
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Definition
| (ending price - beginning price) / beginning price |
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Term
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Definition
| dividend yield + capital gains yield |
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Term
| How do financial markets benefit savers? |
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Definition
| Savers have the ability to invest in financial assets so they can defer consumption and earn a return to compensate them for doing so. |
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Term
| How do financial markets benefits borrowers? |
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Definition
| Borrowers have better access to the capital that is available, allowing them to invest in productive assets. |
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Term
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Definition
| The "extra" return earned for taking on risk. The risk premium is the return over and above the risk-free rate. |
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Term
| Are treasury bills considered to be risky or risk-free? |
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Definition
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Term
| What do variance and standard deviation measure? |
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Definition
| The volatility of asset returns. The greater the volatility, the greater the uncertainty. |
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Term
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Definition
| sum of squared deviations from the mean / (number of observations -1) |
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Term
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Definition
| square root of the variance |
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Term
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Definition
| return earned in an average period over multiple periods |
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Term
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Definition
| average compound return per period over multiple periods |
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Term
| The geometric average will be _________ the arithmetic average unless all the returns are equal. (less than, greater than, equal to) |
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Definition
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Term
| The arithmetic average is overly optimistic for long horizons. Use arithmetic for a planning period of: |
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Definition
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Term
| The geometric average is overly pessimistic for short horizons. Use geometric for a planning period of: |
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Definition
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Term
| If a planning period under consideration is between 20-40 years or so, should the arithmetic or geometric average be used? |
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Definition
| Split the difference between them. |
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Term
| When are stock prices "fairly" priced? |
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Definition
| when they are in equilibrium |
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Term
| When stock prices are in equilibrium, should you be able to earn "abnormal" or "excess" returns? |
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Definition
| no, you should not be able to earn "abnormal" or "excess" returns |
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Term
| Do efficient markets imply that investors can earn a positive return in the stock market? |
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Definition
| no, efficient markets do not imply that investors can earn a positive return |
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Term
| If investors stop researching stocks, what will happen to the market? Why? |
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Definition
| The market will not be efficient. This is because as investors research and new information comes to the market, the information is analyzed and trades are made based on this information. |
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Term
| What do efficient markets indicate? |
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Definition
| On average, you will earn a return that is appropriate for the risk undertaken, and there is not a bias in prices that can be exploited to earn excess returns. |
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Term
| Will market efficiency protect you from wrong choices if you do not diversify? |
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Definition
| No! Don't put all of your eggs in one basket, you stupid silly. |
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Term
| What do prices reflect in strong form efficiency? |
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Definition
| Prices reflect all information, including public and private. |
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Term
| If the market is strong for efficient, can investors earn abnormal returns, regardless of the information they possess? |
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Definition
| no, investors cannot earn abnormal returns regardless of the information they possess |
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Term
| Are markets strong form efficient? |
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Definition
| Empirical evidence indicates that they are NOT SFE, and that insiders can earn abnormal returns, which may be illegal. |
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Term
| What do prices reflect in semistrong form efficiency? |
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Definition
| Prices reflect all publicly available information including trading information, annual reports, press releases, etc. |
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Term
| If the market is semistrong form efficient, can investors earn abnormal returns by trading on public information? |
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Definition
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Term
| Semistrong form efficiency implies that: |
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Definition
| fundamental analysis will not lead to abnormal returns. |
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Term
| What do prices reflect in weak form efficiency? |
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Definition
| all past market information such as price and volume |
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Term
| If the market is weak form efficient, can investors earn abnormal returns by trading on market information? |
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Definition
| no, investors cannot earn abnormal returns by trading on market information |
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Term
| Are markets generally weak form efficient? |
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Definition
| Empirical evidence indicates that markets ARE generally weak form efficient |
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Term
| If the financials markets are strong form efficient, then: |
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Definition
| no one person has an advantage in the marketplace |
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Term
| The returns on stocks are treated as a normal distribution and can be defined by the: |
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Definition
| mean and standard deviation |
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Term
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Definition
| is easier to compute than the geometric average and it ignores the effects of compounding. |
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Term
| If insiders were allowed to profit on their inside information without penalty, would financial markets be more efficient? |
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Definition
| No, they would not be more efficient. |
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Term
| Should investors count capital gains as part of their total return until a security is sold, since the capital gain is really only a "paper gain" up to that point? |
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Definition
| Yes, they should count capital gains as part of their total return. While they are paper gains, most liquid assets could be sold quickly, so capturing a capital gain at an point in time is not difficult. |
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Term
| When calculating your losses, should you ignore losses you avoided by not buying a stock that has since decreased in price? |
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Definition
| Yes you should ignore losses you avoided. |
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Term
| After careful analysis of previous stock prices, you discover you can make normal returns on your investments if you buy oil company stocks just before noon and then sell them immediately before the market closes that day. This is a violation of: |
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Definition
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Term
| Over the 1926 to 2004 period, the nominal risk premium on long-term government bonds has averaged what percentage per year? |
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Definition
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