Flashcards in Topic 6 Deck (38)

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1

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Total dollar return =___________ + Capital gain (or loss)

### Dividend income

2

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Percentage Returns

Percentage return =(Dividends paid at end of period + Change in market value over period) / ________ market value.

### Beginning

3

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+ Real return is the return after taking out the effects of inflation.

+ Real return shows the percentage change in __________ power.

+ Nominal return is the return before taking out the effects of inflation.

+ Nominal return is the percentage change in the of dollars you have.

### buying, number

4

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The FIsher Effect

The Fisher effect explores the relationship between real returns (r), nominal returns (R), and _______ (h).

(1 + R) = (1+r)x(1+h)

The nominal rate is approximately equal to the real rate plus the inflation rate.

R ≈ r + h

### inflation

5

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CAPITAL MARKET HISTORY

+ Risky securities, such as stocks, have had higher average returns than riskless securities, such as Treasury Bills.

+ Stocks of small companies have had higher average returns than those of large companies.

+ Long-term bonds have had higher average yields and returns than ________ bonds.

+ The cost of capital for a company, project, or division can be predicted using data from the markets.

### short-term

6

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AVERAGE RETURNS: THE FIRST LESSON

+ A way to calculate the average returns on different investments is simply to add up returns for a number of periods and divide by the number of periods (e.g. years, months, days, etc.).

+ The ________ is the excess return required from an investment in a risky asset over a risk-free investment.

+ Lesson from history: ______ assets, on average, earn a risk premium (i.e. there is a reward for bearing risk).

### risk premium, Risky

7

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VARIABILITY: THE SECOND LESSON

+ The greater the risk, the greater the potential reward.

+ This lesson holds over the________, but may not be valid for the short term.

### long term

8

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VARIANCE and STANDARD DEVIATION

+ Measures of variability.

+ Variance is the average squared deviation (SUM DIVIDE NUMBER MINUS 1)between the actual return and the average return.

+ Standard deviation is the _______ of the variance.

### square root

9

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CAPITAL MARKET EFFICIENCY

+ The efficient market hypothesis (EMH) asserts that the price of a security accurately reflects all available information.

+ Implies that all investments have a _______ NPV.

+ Implies also that all securities are fairly priced.

+ If this is true then investors cannot earn ‘abnormal’ or ‘excess’ returns.

### zero

10

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Efficient market reaction: The price ___________ adjusts to, and fully reflects, new information. There is no tendency for subsequent increases and decreases.

### instantaneously

11

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Delayed reaction: The price _______ adjusts to the new information. Several days elapse before the price completely reflects the new information.

### partially

12

## Overreaction: The price over-adjusts to the new information. It ‘overshoots’ the new price, and _________ corrects itself.

### subsequently

13

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WHAT MAKES MARKETS EFFICIENT ?

+ There are many investors out there doing research:

- As ______ information comes into the market, this information is analysed and trades are made based on this information.

- Therefore, prices should reflect all available public information.

+ If investors stop researching stocks, then the market will not be efficient.

### new

14

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EMH: COMMON MISCONCEPTIONS

+ __________ do not mean that you can’t make money.

+ They do mean that, on average, you will earn a return that is appropriate for the risk undertaken, and that there is not a bias in prices that can be exploited to earn excess returns.

+ Market efficiency will not protect you from making the wrong choices if you do not diversify—you still don’t want to put all your eggs in one basket.

### Efficient markets

15

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Weak-form efficiency: Current prices reflect information contained in the _______ series of prices.

### past

16

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Semi-strong form efficiency: Current prices reflect information contained in the past series of prices, and all ______ publicly available information.

### other

17

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Strong-form efficiency: Current prices reflect all available information (e.g. past series of prices, public information and ________ information).

### private

18

## Risky assets, on average, earn a ________

### risk premium

19

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The greater the potential _______ from a risky investment, the greater the risk.

### reward

20

## In an efficient market, prices adjust quickly and correctly to ______ information

### new

21

## The Efficient Market Hypothesis (EMH) states that well organised capital markets are efficient, and investors ______make abnormal returns

### cannot

22

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Asset prices in efficient markets are rarely over or under priced, because ‘all available’ information has already been factored into the price, and investors get exactly what they ______.

### pay for

23

## Capital gain (increase) in ________

### share price

24

## The greater the risk is, the ______ the required rate of return

### greater

25

## Following the principle of opportunity cost (the cost of the alternative forgone), at a minimum, the rate of return required on the new project must be ________ than what we get from buy financial assets of similar risk

### greater

26

## _________ returns: return on investment not adjusted for inflation

### Nominal

27

## ________ returns: returns adjusted for the effects of inflation

### Real

28

## ________: relationship between nominal returns, real returns and inflation

### Fisher effect

29

## Treasury Bills : the __________ borrows money by issuing bonds

### government

30