SS345 - Problem Set 3 - Rosie McCarthy

.pdf

School

Fashion Institute Of Technology *

*We aren’t endorsed by this school

Course

345

Subject

Economics

Date

May 3, 2024

Type

pdf

Pages

6

Uploaded by rosiemccarthy927 on coursehero.com

Chapter 10 Questions 5. What was the arithmetic average annual return on large-company stocks from 1926 through 2020: 12.2% a. In nominal terms? 12.2% b. In real terms? 9.3% 9. You've observed the following returns on Pine Computer's stock over the past five years: 8 percent, -12 percent, 14 percent, 21 percent, and 16 percent. a. What was the arithmetic average return on the stock over this five-year period? (8 + -12 + 14 + 21 +16) / 5 = 9.4% b. What was the variance of the returns over this period? The standard deviation? .08 -.014 .000196 Var(R) = .06592/(5-1) = 0.016 = 1.6% SD(R) = √0.016 = 0.1283744 = 12.8% -.12 -.214 .045796 .14 .046 .002116 .21 .116 .013456 .16 .066 .004356 .06592 13. You purchased a zero-coupon bond one year ago for $284.46. The market interest rate is now 5.1 percent. If the bond had 25 years to maturity when you originally purchased it, what was your total return for the past year? Assume semiannual compounding. 4.97% a. P = M / (1 + r / n) ^ nt P = 1000 / (1 + .051 / 2) ^ 2 (24) P = 1000 / 3.348975 P = 298.60 298.60 - 284.46 = 14.14 14.14 / 284.46 = 0.0497 = 4.97% 17. Refer back to L Figure 10.10. What range of returns would you expect to see 68 percent of the time for long-term corporate bonds? What about 95 percent of the time? a. 6.5 - 8.5 = -2.00% 6.5+ 8.5 = 15.00% -2.00% - 15.00% b. 6.5 - 8.5 - 8.5 = -10.5% 6.5 + 8.5 +8.5 = 23.5% -10.50% - 23.50%
Chapter 11 Questions 5. Based on the following information, calculate the expected return. a. .20 x -.13 = -0.026 .80 x .19 = 0.152 -.026 + .152 = 0.126 = 12.6% 9. Returns and Standard Deviations Consider the following information: a. What is the expected return on an equally weighted portfolio of these three stocks? .75 x .07 = 0.053 .25 x .12 = 0.03 SUM = 8.3% .25 x -.08 = -0.02 .75 x .18 = 0.135 SUM = 11.5% .25 x -.21 = -0.052 .75 x .27 = 0.203 SUM = 15.1% (⅓) x 8.3 + (⅓) x 11.5 + (⅓) x 15.1 = 11.58% b. What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C? .20 x .07 = 0.014 .20 x .18 = 0.036 .60 x .27 = 0.162 0.014 + 0.036 + 0.162 = 0.212 = 21.2% .20 x .12 = 0.024 .20 x -.08 = -0.016 .60 x -.21 = -0.126 0.024 + -0.016 + -0.126 = -0.118 = -11.8% .75 (.212 - .11633)^2 + .25 ( -.118 - .116)^2 0.00686456 + 0.013689 = 0.020419 13. A stock has a beta of 1.15, the expected return on the market is 11.3 percent, and the risk-free rate is 3.6 percent. What must the expected return on this stock be? a. E(R;) = R + [E(RM) - R,] X Bi = 0.036 + (0.113 - 0.036) x 1.15 = 0.12455 = 12.46% 17. Asset W has an expected return of 8.8 percent and a beta of .90. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected returns against the betas. What is the slope of the line that results? a. .25 x .088 + (1 -.25) x .026 = .022 + .0195 = 4.15% .25 x .90 = 0.225 Portfolio Expected Return Portfolio Beta .25 4.15% 0.225 .50 5.7% 0.45 .75 7.25% 0.675
1.00 8.8% 0.9 1.25 10.4% 1.125 1.50 11.9% 1.35 Slope =(.088 - .026) / .90 = 0.068 = 6.89%
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Recommended textbooks for you
Text book image
Microeconomics: Principles & Policy
Economics
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:Cengage Learning
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning
Text book image
Principles of Economics 2e
Economics
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:OpenStax
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
SEE MORE TEXTBOOKS
Recommended textbooks for you
Text book image
Microeconomics: Principles & Policy
Economics
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:Cengage Learning
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning
Text book image
Principles of Economics 2e
Economics
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:OpenStax
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
SEE MORE TEXTBOOKS