Fundamentals of Corporate Finance (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Fundamentals of Corporate Finance (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134475561
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Chapter 11, Problem 1CC
Summary Introduction

Average Returns:

Average return is the simple mathematical average of a series of returns that has been generated over a particular time period. The average return can be computed similarly like a simple average for a definite set of numbers. The two common return measures are return on assets, ROA and return on equity, ROE.

To determine: The types of investments that have had the highest average returns and have been the most volatile from year to year.

Expert Solution & Answer
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Answer to Problem 1CC

The small stock has the highest average rate of return and usually carries with it the most volatile rates. This implies that high return stocks have high amount of risk. There exists a strong relationship between return and risk in the direct proportion. The table below shows the risk-return profiles of various indices.

Yearly Average Returns
YearSensexBSE 100Small Cap
2003 − 20046.2591780.291044390.351887811
2004 − 20056.0562280.074707130.294252967
2005 − 20060.2210750.215427370.236645801
2006 − 2007 0.0788170.061103790.007770751
Mean0.1538250.16057070.222639332
Standard deviation0.1012810.11150310.15077397
Return : Risk1.52 : 11.44 : 11.47 : 1

The above table shows the risk and relationship of small stocks. It can be concluded that all small stocks can generate high rate of return with high risk or volatility.

Explanation of Solution

Hence, small types of investments that have the highest average returns and are the most volatile from year to year.

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Chapter 11 Solutions

Fundamentals of Corporate Finance (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)

Ch. 11 - What does the historical relation between...Ch. 11 - What are the components of a stock's realized...Ch. 11 - What is the intuition behind using the average...Ch. 11 - Prob. 4CTCh. 11 - How does the relationship between the average...Ch. 11 - Consider two local banks. Bank A has 100 loans...Ch. 11 - What is meant by diversification and how does it...Ch. 11 - Which of the following risks of a stock are likely...Ch. 11 - Prob. 9CTCh. 11 - Prob. 10CTCh. 11 - If you randomly select 10 stocks for a portfolio...Ch. 11 - Why doesn't the risk premium of a stock depend on...Ch. 11 - Prob. 13CTCh. 11 - DATA CASE Today is April 30, 2016, and you have...Ch. 11 - Convert these prices to monthly returns as the...Ch. 11 - Prob. 3DCCh. 11 - Prob. 4DCCh. 11 - Prob. 5DCCh. 11 - What do you notice about the average of the...Ch. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Your portfolio consists of 100 shares of CSH and...Ch. 11 - You have just purchased a share of stock for $20....Ch. 11 - You expect KStreet Co's trade at $100 per share...Ch. 11 - The following table contains prices and dividends...Ch. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Use the data in SBUX_GOOG.xlsx on MFL to answer...Ch. 11 - Download the spreadsheet from the book's Web the...Ch. 11 - Prob. 12PCh. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 15PCh. 11 - Consider the following five monthly returns: a....Ch. 11 - Explain the difference between the arithmetic...Ch. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Prob. 21PCh. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - You are a risk-averse investor who is considering...Ch. 11 - Consider the following 6 months of returns for 2...
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