FUND. OF CORPORATE FIN. 18MNTH ACCESS
15th Edition
ISBN: 9781259811913
Author: Ross
Publisher: MCG CUSTOM
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Chapter 12.2, Problem 12.2ECQ
What was the longest “winning streak” (years without a negative return) for large-company stocks? For long-term government bonds?
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Assume that over the last several decades the total annual returns of large-company common stocks averaged 12.1% small company stocks averaged 16.5% long-term government bonds averaged 6% and us tbills averaged 3.4%. What was the average excess return earned by long-term government bonds and small company stocks respectively?
Among the following types of investments, small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, and U.S. Treasury bills, small-company stocks had a risk premium of 13.2 percent for the past 90 years. What does the term "risk premium" mean? Is the risk premium on small-company stocks considered to be relatively high or relatively low when compared to other investment classes? Explain why.
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Chapter 12 Solutions
FUND. OF CORPORATE FIN. 18MNTH ACCESS
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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- Historical stock returns show that small - company stocks produced an average return of 17.4 percent, inflation averaged 3.1 percent, U.S. Treasury bills returned an average 3.8 percent, and long - term corporate bonds returned 6.2 percent. What was the risk premium on small - company stocks for that period?arrow_forwardOver the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? Multiple Choice Large-company stocks U.S. Treasury bills Small-company stocks Long-term corporate bonds Long-term government bondsarrow_forwardAssume the average return on utility stocks was 8.9% over the past 40 years. �If the average return on Treasury bills was 3.8% over that period, what is the historical risk premium for utility stocks?arrow_forward
- Use the following table: Series Average return Large stocks 11.76 % Small stocks 16.46 Long-term corporate bonds 6.23 Long-term government bonds 6.10 U.S. Treasury bills 3.83 Inflation 3.10 a. Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds. b. What was the return on a portfolio that was equally invested in small stocks and Treasury bills?arrow_forwardBased on Table 12.1 on page 392 answer the following questions: A. Which were the three worst years for Large-Company stocks? What economic event was happening when the stock market was doing so poorly? B. What were the best years for U.S. Treasury bills? What was happening in the economy that caused them to do so well? C. When stocks go down, how do long-term government bonds typically do? Provide at least two years of data that support your position.arrow_forwardConsider the information below relating to the monthly rates of return for two companies X and Y over a period of 4 months: Y 2 xRate of return yRate of Return Date Month 1 -4.76 -4.75 Month 2 5.34 7.65 Month 3 12.09 6.98 Month 4 -2.98 9.65 a) If a firm increases its financial risk by selling a large bond issue that increases its financial leverage explain this assumption? Also what is the relationship between risk and return. Explain with examples.arrow_forward
- For the cost of equity (stock) is it better to use the current US Treasury bill rate or a longer-termgovernment bond rate as the risk-free rate of return?Does the rate you use as the risk-free rate have an impact on what market premium might beappropriate? Historically, large-company stocks have earned an average return of 12.1% per annum, while US Treasury bills and long-term government bonds have earned average returns of 3.5% and5.9% respectively.arrow_forwardIn general, which of the following statements is true about a corporate bond's coupon rate? Group of answer choices It decreases as a bond nears maturity. It is identical to the discounting rate. It changes in sync with market interest rates. It changes every year. It is fixed until the bond matures.arrow_forwardA company wishes to raise funds by issuing either bonds or cumulative preferred stock. How will the annual interest or dividend affect total liabilities each year? a. Interest is a current liability each year (until paid) b. Interest and cumulative preferred dividends in arrears are non-current liabilities each year (until paid) c. Cumulative preferred dividend in arrears are a current liability each year (until paid) d. Both interest and cumulative preferred dividends in arrears are current liabilities each year (until paid)arrow_forward
- The attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.arrow_forwardSuppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Year Large-Company stocks US Treasury bills 1 3.95% 6.53% 2 14.13 4.38 3 19.07 4.25 4 −14.61 7.30 5 −32.10 4.94 6 37.32 6.14 a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent…arrow_forwardThe average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 8% since 1926. Why, then, does anyone invest in Treasury bills?arrow_forward
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