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Part B END-OF-CHAPTER SOLUTIONS Fundamentals of Investments, 5th edition Jordan and Miller Chapter 1 A Brief History of Risk and Return Concept Questions 1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return. 2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the dividend yield must be four percent. 3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –100 percent; if returns were truly normally distributed, you could lose much more. 4. To calculate an arithmetic return, you…show more content…
8. Geometric return = .0982 or 9.82% 9. Arithmetic return = .1167 or 11.67% Geometric return = .0982 or 9.82% Intermediate Questions 10. That’s plus or minus one standard deviation, so about two-thirds of the time or two years out of three. In one year out of three, you will be outside this range, implying that you will be below it one year out of six and above it one year out of six. 11. You lose money if you have a negative return. With a 7 percent expected return and a 3.5 percent standard deviation, a zero return is two standard deviations below the average. The odds of being outside (above or below) two standard deviations are 5 percent; the odds of being below are half that, or 2.5 percent. (It’s actually 2.28 percent.) You should expect to lose money only 2.5 years out of every 100. It’s a pretty safe investment. 12. The average return is 5.8 percent, with a standard deviation of 9.2 percent, so Prob( Return < –3.4 or Return > 15.0 ) ≈ 1/3, but we are only interested in one tail; Prob( Return < –3.4) ≈ 1/6, which is half of 1/3 . 95%: = –12.6% to 24.2% 99%: = –21.8% to 33.4% 13. Expected return = 17.4% ; σ = 32.7%. Doubling your money is a 100% return, so if the return distribution is normal, Z = (100 – 17.4)/32.7 = 2.53 standard deviations; this is in-between two and three standard deviations, so the probability is small, somewhere between .5% and 2.5% (why?). Referring to
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