3. Consider two investments which have each produced returns over a period of seven years. Investment A produced a return of 20% in year one, zero in year two, 20% in year three, zero in year four, 20% in year five, zero in year six, and 12% in year seven. Investment B produced a return of 10% in each year. 3 a. Compute the arithmetic and geometric mean returns for each investment. 3 b. Beginning with $1000, work out what the value of each of the investments would have been after seven years, and determine which was the better invest- ment. 3 c. The two mean-return calculations, arithmetic and geometric, rank the in- vestments differently. Which one of the two correctly reproduces the ranking by total final value? Why does the other mean calculation get it 'wrong'?

3. Consider two investments which have each produced returns over a period of seven years. Investment A produced a return of 20% in year one, zero in year two, 20% in year three, zero in year four, 20% in year five, zero in year six, and 12% in year seven. Investment B produced a return of 10% in each year. 3 a. Compute the arithmetic and geometric mean returns for each investment. 3 b. Beginning with $1000, work out what the value of each of the investments would have been after seven years, and determine which was the better invest- ment. 3 c. The two mean-return calculations, arithmetic and geometric, rank the in- vestments differently. Which one of the two correctly reproduces the ranking by total final value? Why does the other mean calculation get it 'wrong'?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Q1 (A). An investment of $100 produces rate of return as follows In year 1: a gain of 10 percent In year 2: a loss of percent In year 3: a loss of 8 percent In year 4: a gain of 3 percent. Calculate the value of the investment at the end of the fourth year and calculate the mean annual rate of return.
Kynan has an investment with the following annual returns for four years: • Year 1: 10% • Year 2: -3% • Year 3: 5% • Year 4: 11% What is the arithmetic average? The answer can be as a whole number or decimalKynan has an investment with the following annual returns for four years: • Year 1: 10% • Year 2: -3% • Year 3: 5% • Year 4: 11% What is the arithmetic average? The answer can be as a whole number or decimal
Assume the returns from holding an asset are normally distributed. Also assume the average annual return for holding the asset a period of time was 15.3 percent and the standard deviation of this asset for the period was 33.2 percent. Use the NORMDIST function in Excel® to answer the following questions. a. What is the approximate probability that your money will double in value in a single year? (Do not round intermediate calculations and enter your answer as a percent rounded to 3 decimal places, e.g., 32.161.) b. What is the approximate probability that your money will triple in value in a single year? (Do not round intermediate calculations and enter your answer as a percent rounded to 8 decimal places, e.g., 32.16161616.)
An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over the past four years. What is the standard deviation of these returns? * 3.7% 4.6% 4.1% 4.3%
An investment earns 7% the first year, earns 12% the second year, and loses 10% the third year. The geometric average return over the three years was ________ Select one: a. 9.65% b. 2.55% c. 3% d. 3.59% e. 9.67%
Anjelo Jonathan a financial analyst for Blues Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Anjelo’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $20,000; investment Y had a market value of $55,000. During the year, investment X generated cash flow of $1,500 and investment Y generated cash flow of $6,800. The current market values of investments X and Y are $21,000 and $55,000, respectively. A.) Calculate the expected rate of return on investments X using the most recent year’s data. (Format: 11.11%)B.) Calculate the expected rate of return on investments Y using the most recent year’s data. (Format: 11.11%)C.) Assuming that the two investments are equally risky, which one should Anjelo recommend? (Investment X or Investment Y)
Suppose that you have $9,000 in a rather risky investment recommended by your financial advisor. During the first year, your investment decreases by 40% of its original value. During the second year, your investment at the end of year one increases by 50%. Your advisor tells you that there must have been a 10% an overall increase of your original $9,000 investment. Is your financial advisor using percentages properly? If not, what is your actual percent gain or loss of your original $9,000 investment?
Suppose the rates of return were 100% in the 1st year, -50% in the 2nd year. If you had invested at the beginning of 1st year $1,000 and another $1,000 at the beginning of the second year, what would have been the internal rate of return over the two-year span? Please show work in a spreadsheet and thank you!
Suppose that you have 12, 000 in a rather risky investment recommended by your financial advisor. During the first year, your investment decreases by 40% of its original value. During the second year, your investment at the end of year one increases by 50%. Your advisor tells you that there must have been a 10% overall increase of your original $12, 000 investment. Is your financial advisor using percentages properly? If not, what is your actual percent gain or loss of your original $12, 000 investment?
Assume you invested in an asset for two years. The first year you earned a 15% return, and the second year you earned a negative 10% return. What was your annual geometric return?
An investment of $8,000 is made at time 0 with returns of $3,500 at the end of each of years 1–4, with all monetary amounts being in real dollars. Inflation is running 7% per year over that time. Also, the real rate of return is 15% per year. Determine the present worth of the investment using both real dollars and then-current dollars.
A $90,000 investment is made. Over a 5-year period, a return of $30,000 occurs at the end of the first year. Each successive year yields a return that is $3,000 less than the previous year’s return. If money is worth 5%, use agradient series factor to determine the equivalent present worth for theinvestment.

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