Multifactor Models of Risk and Return Chapter 9

Price-to-Earnings Ratio (P/E) — The number by which expected earnings per share is multiplied to estimate a stock's value; also called the earnings ______.

Small Firm Effect — A frequent empirical anomaly where risk-adjusted stock returns for companies with low market capitalization are significantly larger than those generated by high market ______.

Balance sheet — A financial statement that shows what assets the firm controls at a fixed point in time and how it has financed these ______.

Common-size statements — The normalization of balance sheet and income statement items to allow for more meaningful comparison of different-sized ______.

DuPont system — A method of examining ROE by breaking it down into three component parts: (1) profit margin, (2) total asset turnover, and (3) financial ______.

Anomalies are security price relationships that appear to contradict the efficient market hypothesis.

EBITDA — Earnings before interest, taxes, depreciation, and ______.

Arbitrage is a trading strategy designed to generate a guaranteed profit from a transaction that requires no capital commitment or risk bearing on the part of the trader. A simple example of an arbitrage trade would be the simultaneous purchase and sale of the same security in different markets at different prices.

Arbitrage Pricing Theory (APT) posits that the expected return to a financial asset can be described by its relationship with several common risk factors. The multifactor APT can be contrasted with the single-factor CAPM.

Capital Asset Pricing Model (CAPM) is a theory concerned with deriving the expected or required rates of return on risky assets based on the assets’ systematic risk relative to a market portfolio.

Growth Stock is a stock issue that generates a higher rate of return than other stocks in the market with similar risk characteristics.

January Effect is a frequent empirical anomaly where risk-adjusted stock returns in the month of January are significantly larger than those occurring in any other month of the year.