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RWJ Chap 12 Qn 9a
9. You've observed the following returns on Crash-n-Burn
Computer's stock over the past five years: 7 percent,
12 percent, 11 percent, 38 percent, and 14 percent.
a. What was the arithmetic average return on Crash-nBurns stock over this five-year period?
To find the average return, we sum all the returns and divide
by the number of returns, so:
Average return =
(.07 .12 +.11 +.38 +.14)/5 = .1160 or 11.60%
RWJ Chap 12 Qn 9b
9. b. What was the variance of Crash-n-Burns return over
his period? The standard deviation?
Totals
(1)
Actual
Return
(2)
Average
Return
(3)
Deviation
(1) (2)
(4)
Squared
Deviation
0.07
0.116
-0.046
0.002116
-0.12
0.116
-0.236
0.055696
0.11
0.116
-0.006
3.6 x
0.38
0.116
0.264
0.069696
0.14
0.116
0.024
0.000576
0.000
0.12812
0.58
RWJ Chap 12 Qn 9b
Using the equation to find Variance,
Variance = 1/4[(.07 .116)^2 + (.12 .116)^2 +
(.11 .116)^2 + (.38 .116)^2 +(.14 .116)^2]
Variance = 0.032030
So, the standard deviation is:
Standard deviation = (0.03230)^(1/2) =
0.1790 or 17.90%
on Crash-n-Burns stock?
RP = R Rf = .1160 .042
= .0740 or 7.40%
RWJ Chap 12 Qn 11
11. Given the information in the problem just above, what
was the average real risk-free rate over this time
period? What was the average real risk premium?
We can find the average real risk-free rate using the Fisher
equation. The average real risk-free rate was:
(1 + R) = (1 + r)(1 + h)
rf = (1.042/1.035) 1 = .0068 or 0.68%
Average real risk premium can be found by subtracting the
average risk-free rate from the average real return.
rp = r rf = 7.83% 0.68% = 7.15%
RWJ Chap 12 Qn 16
16.
Year
Price
Dividend Dollar
Return
% Return
1+r
$60.18
73.66
$0.60
$14.08
0.23396
1.23396
94.18
0.64
21.16
0.28726
1.28726
89.35
0.72
-4.11
-0.0436
0.9564
78.49
0.80
-10.06
-0.11259
0.88874
95.05
1.20
17.76
0.22627
1.22627
RWJ Chap 12 Qn 16
16.
Arithmetic average return :
RA = (0.2340 + 0.2873 0.0436 0.1126 +
0.2263)/5
= 0.1183 or 11.83%
Geometric average return:
RG = [(1 + .2340)(1 + .2873)(1 .0436)(1
.1126)(1 + .2263)]^(1/5) 1
= 0.1058 or 10.58%
RWJ Chap 13 Qn 23
23.
Consider the following information on three stocks:
a. If your portfolio is invested 40 percent each in A
and B and 20 percent in C, what is the portfolio
expected return? The variance? The standard
deviation?
RWJ Chap 13 Qn 23 c
The approximate expected real return is the expected
nominal return minus the inflation rate, so:
Approximate expected real return = .1612 .035
= .1262 or 12.62%
To find the exact real return, we will use the Fisher
equation. Doing so, we get:
1 + E(Ri) = (1 + h)[1 + e(ri)]
1.1612 = (1.0350)[1 + e(ri)]
e(ri) = (1.1612/1.035) 1 = .1219 or 12.19%
RWJ Chap 13 Qn 23 c
Approximate real risk premium=
expected return - risk-free rate, so:
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