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Flashcards in Topic 6 Deck (38)
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1

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

Dividend income

2

Percentage Returns

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

Beginning

3

+ 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

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

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

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

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

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

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

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

instantaneously

11

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

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

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

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

past

16

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

other

17

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

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

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

Risk premium: the _______ return required from an investment in a risky asset over a risk-free investment

excess