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1.
The return of any asset is the increase in price, plus any dividends or cash flows, all
divided by the initial price. The return of this stock is:
R = [($87 78) + 1.25] / $78
R = .1314 or 13.14%
2.
The dividend yield is the dividend divided by price at the beginning of the period
price, so:
Dividend yield = $1.25 / $78
Dividend yield = .0160 or 1.60%
And the capital gains yield is the increase in price divided by the initial price, so:
Capital gains yield = ($87 78) / $78
Capital gains yield = .1154 or 11.54%
3.
7.
The average return is the sum of the returns, divided by the number of returns. The
average return for each stock was:
i 1
i 1
i 1
N 1
1
.15 .114 2 .04 .114 2 .13 .114 2 .34 .114 2 .17 .114 2 .030130
5 1
1
.29 .146 2 .06 .146 2 .19 .146 2 .07 .146 2 .38 .146 2 .041630
5 1
sX
sY
sX
The standard deviation is the square root of the variance, so the standard deviation of each
stock is:
sX = (.030130)1/2
sX = .1736 or 17.36%
sY = (.041630)1/2
sY = .2040 or 20.40%
8. We will calculate the sum of the returns for each asset and the observed risk
premium first. Doing so, we get:
Year
premium
1973
1974
1975
1976
1977
1978
a.
14.69%
26.47
37.23
23.93
7.16
6.57
7.29%
7.99
5.87
5.07
5.45
7.64
19.41
39.31
Risk
21.98%
34.46
31.36
18.86
12.61
1.07
19.90
The average return for large company stocks over this period was:
Large company stock average return = 19.41% /6
Large company stock average return = 3.24%
And the average return for T-bills over this period was:
Using the equation for variance, we find the variance for large company stocks over
this period was:
d.
Before the fact, for most assets the risk premium will be positive;
investors demand compensation over and above the risk-free return to invest their money
in the risky asset. After the fact, the observed risk premium can be negative if the assets
nominal return is unexpectedly low, the risk-free return is unexpectedly high, or if some
combination of these two events occurs.
9.
a.
To find the average return, we sum all the returns and divide by the number of returns,
so:
Arithmetic average return = (.25 +.36 + .09 + .11 + .17)/5
Arithmetic average return = .0960 or 9.60%
b.
13. To find the return on the zero coupon bond, we first need to find the price of the
bond today. We need to remember that the price for zero coupon bonds is calculated with
semiannual periods. Since one year has elapsed, the bond now has 19 years to maturity,
so the price today is:
P1 = $1,000/1.04538
P1 = $187.75
There are no intermediate cash flows on a zero coupon bond, so the return is the
capital gains, or:
R = ($187.75 162.87) / $162.87
R = .1528 or 15.28%
15. The return of any asset is the increase in price, plus any dividends or cash flows, all
divided by the initial price. This stock paid no dividend, so the return was:
R = ($46.81 41.05) / $41.05
R = .1403 or 14.03%
This is the return for three months, so the APR is:
APR = 4(14.03%)
APR = 56.13%
And the EAR is:
EAR = (1 + .1403)4 1
EAR = .6908 or 69.08%
17. Looking at the long-term corporate bond return history in Figure 10.10, we see that
the mean return was 6.2 percent, with a standard deviation of 8.5 percent. The range
of returns you would expect to see 68 percent of the time is the mean plus or minus 1
standard deviation, or:
R 1 = 6.2% 8.5% = 2.30% to 14.70%
The range of returns you would expect to see 95 percent of the time is the mean plus
or minus 2 standard deviations, or:
R 2 = 6.2% 2(8.5%) = 10.80% to 23.20%
18. Looking at the large-company stock return history in Figure 10.10, we see that the
mean return was 12.3 percent, with a standard deviation of 20.1 percent. The range
of returns you would expect to see 68 percent of the time is the mean plus or minus 1
standard deviation, or:
R 1 = 12.3% 20.1% = 7.80% to 32.40%
The range of returns you would expect to see 95 percent of the time is the mean plus
or minus 2 standard deviations, or:
R 2 = 12.3% 2(20.1%) = 27.90% to 52.50%
Intermediate
19. Here, we know the average stock return, and four of the five returns used to compute
the average return. We can work the average return equation backward to find the
missing return. The average return is calculated as:
.11 = (.13 .18 + .09 + .36 + R) / 5
.55 = .13 .18 + .09 + .36 + R
R = .15 or 15%
The missing return has to be 15 percent. Now, we can use the equation for the
variance to find:
Variance = 1/4[(.13 .11)2 + (.18 .11)2 + (.09 .11)2 + (.36 .11)2 + (.15 .11)2]
Variance = 0.037250
And the standard deviation is:
Standard deviation = (0.037250)1/2
Standard deviation = 0.1930 or 19.30%
20. The arithmetic average return is the sum of the known returns divided by the number
of returns, so:
Arithmetic average return = (.36 + .19 + .27 .07 + .06 .13) / 6
Arithmetic average return = .1567 or 15.67%
Using the equation for the geometric return, we find: