Finance Fin501 Ch 1-3

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Chapter 1 A Brief History of Risk and Return 6. Cherry: RA = 8.60% Var = 1/4[(.17 – .086)2 + (.11 – .086)2 + (–.02 – .086)2 + (.03 – .086)2 + (.14 – .086)2] = 0.00623 Standard deviation = (0.00623)1/2 = 0.0789 or 7.89% Straw: RB = 10.20% Var = 1/4[(.16 – .102)2 + (.18 – .102)2 + (–.06 – .102)2 + (.01 – .102)2 + (.22 – .102)2] = 0.01452 Standard deviation = (0.01452)1/2 = 0.1205 or 12.05% 7. The capital gains yield is ($49 – 56)/$56 = –.1250 or –12.5% (notice the negative sign). With a dividend yield of 1.3 percent, the total return is –11.20%. 8. Geometric return = [(1 + .17)(1 + .11)(1 - .02)(1 + .03)(1 + .14)](1/5) – 1 = .0837 or 8.37% 9. Arithmetic return = (.21 + .12 + .07 –.13 – .04 + .26) / 6 = .0817 or 8.17% Geometric return = [(1 + .21)(1 + .12)(1 + .07)(1 – .13)(1 – .04)(1 + .26)](1/6) – 1 = .0730 or 7.30%

20. Stock A: RA = (0.08 + 0.08 + 0.08 + 0.08 + 0.08)/5 = .0800 or 8.00% Var = 1/4[(.08 – .08)2 + (.08 – .08)2 + (.08 – .08)2 + (.08 – .08)2 + (.08 – .08)2] = 0.000000 Standard deviation = (0.000)1/2 = 0.000 or 0.00% RG = [(1 + .08)(1 + .08)(1 + .08)(1 +.08)(1 + .08)]1/5 – 1 = .0800 or 8.00% Stock B: RA = (0.03 + 0.13 + 0.07 + 0.05 + 0.12)/5 = .0800 or 8.00% Var = 1/4[(.03 – .08)2 + (.13 – .08)2 + (.07 – .08)2 + (.05 – .08)2 + (.12 – .08)2] = 0.001900 Standard deviation = (0.001900)1/2 = 0.0436 or 4.36% RG = [(1 + .03)(1 + .13)(1 + .07)(1 + .05)(1 + .12)]1/5 – 1 = .0793 or 7.93% Stock C: RA = (–0.24 + 0.37 + 0.14 + 0.09 + 0.04)/5 = .0800 or 8.00% Var = 1/4[(–.24 – .08)2 + (.37 – .08)2 + (.14 – .08)2 + (.09 – .08)2 + (.04 – .08)2] = 0.047950 Standard deviation = (0.047950)1/2 = 0.2190 or 21.90% RG = [(1 – .24)(1 + .37)(1 + .14)(1 + .09)(1 + .04)]1/5 – 1 = .0612 or 6.12% The larger the standard deviation, the greater will…...

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