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
If you assume returns follow a normal distribution, which investment would give a better chance of getting at least $40 million return?
We know that +/- 1.96 standard deviations from the mean will contain 95% of the values. So, we can get the standard deviation by:
Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.
How much would you pay for a security that pays you $500 every 4 months for the next 10 years if you require a return of 8% per year compounded monthly?
An investor would invest in a security for the return. However that return comes with a premium, the Risk. The higher the risk an investor is willing to take the higher the returns would
First we find E by doing Zc(standard deviation/square root of number of trials.) Now we add and subtract that number from the mean income to find both endpoints. The Zc of 95% is 1.96 so we would do
Moderate risk; mutual funds can earn significantly more money but can also potentially lose more.
The mean for the median column of the worksheet is 3.6Yes, the estimate is centered about the parameter of interest.
E[RB ] = 0.3 × 0.14 + 0.4 × (−0.04) + 0.3 × 0.08 = 0.05 = 5%.
After one year, all superannuation strategies offered returns between -0.20 per cent and 0.15 per cent, and are exemplified in the graph below (Figure 4).
As of November 17, 2017, we had a negative return of 7.46%, whereas the benchmark index generated a return of 3.48%, meaning that we underperformed the benchmark by 10.94%. The decrease in market value of common stock holdings accounted for approximately 3.46% of the total loss, and losses from futures contracts accounted for approximately 4%. The standard deviation of our portfolio was 3.41%. Our portfolio had a shape ratio of -2.35%, and the information ratio was computed to be -9.6%.
b. What would Mrs. Beach have to deposit if she were to use common stock and earned an average rate of return of 11%.
12. Please return the cost of capital to 9%. Sigma squared is the variance in the rate of return of the project. The calculations for the variance are in the first table of worksheet 2. Determining sigma squared is one of the most challenging tasks in calculating the value of a real option. In this example, we suggest asking managers for their best and worst case estimates of the benefits, given the expected benefits taken from worksheet 1. Just above the table, there is a percentage number for the range surrounding the expected returns, which starts at 20%. This says that the worst estimate is 80% of the expected, and the best is 120% of the expected.
2.68 0.75 69.69 4.83 105.26 50.56 94.69 135.65 6.58 1.24 0.71 0.64 4.84 1.30 41.97% 16.13% 8.32% 12.99% 35.22%
Probably no more than 6.5% compounded annually. You know that 's a paltry return vis-a-vis some other risk-free return instruments, right?