Reading 46: Discounted Dividend Valuation - LOS e ～ Q1-3 determine, style, equity, returns, average

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1.Historical information used to determine the long-term average returns from equity markets may suffer from survivorship bias, resulting in:

A)   deflating the mean return.

B)   unpredictable results.

C)   inflating the mean return.

D)   revision to the mean.

2.The volatility of equity returns requires us to use data from long time periods to compute mean returns. One problem that this causes is that:

A)   data from previous years is difficult to get.

B)   inflation alters the value of the past returns.

C)   the past is rarely an indication of the future.

D)   equity premiums vary over time with perceived risk.

3.The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):

A)   limits its usefulness in estimating the required return of an asset.

B)   was settled by the work of Harry Markowitz in 1972.

C)   has little practical effect because they are both very close.

D)   renders the CAPM theoretically unsound.

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答案和详解如下：

1.Historical information used to determine the long-term average returns from equity markets may suffer from survivorship bias, resulting in:

A)   deflating the mean return.

B)   unpredictable results.

C)   inflating the mean return.

D)   revision to the mean.

The correct answer was C)

Survivorship bias refers to the weeding out of underperforming firms, resulting in an inflated value for the mean return.

2.The volatility of equity returns requires us to use data from long time periods to compute mean returns. One problem that this causes is that:

A)   data from previous years is difficult to get.

B)   inflation alters the value of the past returns.

C)   the past is rarely an indication of the future.

D)   equity premiums vary over time with perceived risk.

The correct answer was D)

The primary problem with using returns gathered over a long time period is that equity premiums vary over time with the market’s perception of risk and relative risk.

3.The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):

A)   limits its usefulness in estimating the required return of an asset.

B)   was settled by the work of Harry Markowitz in 1972.

C)   has little practical effect because they are both very close.

D)   renders the CAPM theoretically unsound.

The correct answer was A)

There are several characteristics of the CAPM that limit its usefulness in determining the required returns, including the uncertainty whether we should use arithmetic or geometric means as the appropriate measure of long-term average returns.