| Prob 12-1 | From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for |
| | each asset. |
| Asset | ASSET ANNUAL RETURNS |
| A | 5% | 10% | 15% | 4% |
| B | -6% | 20% | 2% | -5% | 10% |
| C | 12% | 15% | 17% |
| D | 10% | -10% | 20% | -15% | 8% | -7% |
| | Average Return | Variance | Standard
Deviation | Coefficient
of Variation |
| Asset A |
| Asset B |
| Asset C |
| Asset D |
| Prob 12-2 | Based upon your answers to question 1, which asset appears riskiest based on standard deviation? Based on coefficient of variation? |
| Prob 12-5 | RCMP, Inc. shares rose 10 percent in value last year while the inflation rate was 3.5 percent. What was the real return on the stock? |
| | If an investor sold the stock after one year and paid taxes on the investment at a 15 percent tax rate, what is the real after-tax return |
| | on the investment? |
| | Real return on stock |
| | real after-tax return on investment |
| Prob 12-10 | Given her evaluation of current economic conditions, Ima Nutt believes there is a 20 percent probability of recession, a 50 |
| | percent chance of continued steady growth, and a 30 percent probability of inflationary growth. For each possibility, Ima has |
| | developed an interest rate forecast for long-term Treasury bond interest rates: |
| | Economic Forecast | Interest Rate Forecast |
| | Recession | 6 percent |
| | Constant growth | 9 percent |
| | Inflation | 14 percent |
| | a. What is the expected interest rate under Ima’s forecast? |
| | Expected interest rate under Ima's forecast |
| | b. What is the variance and standard deviation of Ima’s interest rate forecast? |
| | Variance |
| | Standard Deviation |
| | c. What is the coefficient of variation of Ima’s interest rate forecast? |
| | Coefficient of variation of Ima's interest rate forecast |
| | d. If the current long-term Treasury bond interest rate is 8 percent, should Ima consider purchasing a Treasury bond? Why or why not? |
| | |
| Prob 12-11 | a. What is Ima’s expected return forecast for Wallnut stock? |
| | Forecast of expected return |
| | b. What is the standard deviation of the forecast? |
| | Standard Deviation |
| | c. If Wallnut’s current price is $20 per share and Wallnut is expected to pay a dividend of $0.80 per share next year, what |
| | price does Ima expect Wallnut to sell for in one year? |
| | Expected price in 1 year |
| Prob 12-19 | EXCEL Spreadsheets are useful for computing statistics: averages, standard deviation, variance, and correlation are included as |
| | built-in functions. Below is recent monthly stock return data for ExxonMobil (XOM) and Microsoft (MSFT). Using a spreadsheet |
| | and its functions, compute the average, variance, standard deviation, and correlation between the returns for these stocks. |
| | Month | XOM Return | MSFT Return |
| | November | -4.6% | 10.4% |
| | October | 0.1% | 13.6% |
| | September | -1.9% | -10.3% |
| | August | -3.3% | -13.8% |
| | July | -4.4% | -9.3% |
| | June | -1.6% | 5.5% |
| | May | 0.7% | 2.1% |
| | April | 9.4% | 23.9% |
| | March | -0.1% | -7.3% |
| | February | -3.2% | -3.4% |
| | | XOM | MSFT |
| | Average Return |
| | Variance |
| | Standard Deviation |
| | Correlation |
| | What does the correlation between the returns imply for a portfolio containing both stocks? |
Dahayn
week_5.xlsx
