INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 21PS
Summary Introduction
To compute: Annual
Introduction: An investor may invest in various stocks to reduce the risk of losses. Such a theory is called correlation theory. It is believed that an investor takes a lot of risk to achieve higher
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The data presented below represents the expected returns on a financial asset in different seasons of the year.
Season of year
Probability
Returns
Spring
40%
2%
Summer
35%
6%
Winter
25%
10%
What is the expected return on the asset?
ii) What is the standard deviation on the asset?
What is the covariance of the asset?
Suppose the returns on an asset are normally distributed. The historical average annual return for the asset was 5.2 percent and the standard deviation was 10.6 percent.
a.
What is the probability that your return on this asset will be less than –9.7 percent in a given year? Use the NORMDIST function in Excel® to answer this question.
b.
What range of returns would you expect to see 95 percent of the time?
c.
What range of returns would you expect to see 99 percent of the time?
Suppose the average return on Asset A is 6.6 percent and the standard deviation is 8.6 percent and the average return and standard deviation on Asset B are 3.8 percent and 3.2 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions.
a.
What is the probability that in any given year, the return on Asset A will be greater than 11 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
b.
What is the probability that in any given year, the return on Asset B will be greater than 11 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c-1.
In a particular year, the return on Asset A was −4.25 percent. How likely is it that such a low return will recur at some point in the future? (Do…
Chapter 7 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 7 - Prob. 1PSCh. 7 - Prob. 2PSCh. 7 - Prob. 3PSCh. 7 - Prob. 4PSCh. 7 - Prob. 5PSCh. 7 - Prob. 6PSCh. 7 - Prob. 7PSCh. 7 - Prob. 8PSCh. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - Prob. 15PSCh. 7 - Prob. 16PSCh. 7 - Prob. 17PSCh. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - Prob. 21PSCh. 7 - Prob. 22PSCh. 7 - Prob. 23PSCh. 7 - Prob. 1CPCh. 7 - Prob. 2CPCh. 7 - Prob. 3CPCh. 7 - Prob. 4CPCh. 7 - Prob. 5CPCh. 7 - Prob. 6CPCh. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - Prob. 9CPCh. 7 - Prob. 10CPCh. 7 - Prob. 11CPCh. 7 - Prob. 12CPCh. 7 - Prob. 13CP
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- Suppose the returns on an asset are normally distributed. The historical average annual return for the asset was 6.4 percent and the standard deviation was 12.4 percent. A. What range of returns would you expect to see 95 percent of the time? (Enter your answers for the range from lowest to highest. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) B. What range of returns would you expect to see 99 percent of the time? (Enter your answers for the range from lowest to highest. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardOver a particular period, an asset had an average return of 5.2 percent and a standard deviation of 8.5 percent. What range of returns would you expect to see 95 percent of the time for this asset?arrow_forwardThe JCI Index showed the following Rs for a 6-year period: 11.1%, -5.2%, 20.3%, 26.7%, -12.4%, and 2,2%. (a) Calculate the arithmetic mean return for the 6-year period. (b) Calculate the geometric mean return for the 6-year period.arrow_forward
- Given the data here, Compute the average return for each of the assets from 1929 to 1940 (the Great Depression) (Round to five decimalplaces.) Compute the variance and standard deviation for each of the assets from 1929 to 1940. (Round to five decimalplaces.) Which asset was riskiest during the Great Depression? How does that fit with your intuition? (Round to five decimalplaces.) Note: Notice that the answers for average return, variance and standard deviation must be entered in decimal format.arrow_forwardTwo investments generated the following annual returns (refer to image): a. What is the average annual return on each investment?b. What is the standard deviation of the return on investments X and Y?c. Based on the standard deviation, which investment was riskier?arrow_forward(a) An asset has recorded the following closing prices over a period of 5 days: 100 (day 1), 105 (day 2), 103 (day 3), 110 (day 4), and 120 (day 5). Calculate: (i) the net return at the end of the 5-day period (ii) the log return at the end of the 5-day period (iii) the average log return over this 5-day period (b) Suppose the distribution for the above returns follows the normal distribution with a mean value of 5, and a standard deviation of 2. Given that the 5% quantile value is -1.645, what is the 5% 10 days value-at-risk for a portfolio of a value of £100,000? (c)Explain why bootstrapping is necessary when using the historical simulation method for value-at-risk and why it is not necessary when using the Monte Carlo simulation methodarrow_forward
- Use the following information to compute the standard deviation of returns: Yearly Returns Year Return (%) 1 19 2 1 3 10 4 26 5 4arrow_forwarduppose the average return on Asset A is 7.1 percent and the standard deviation is 8.3 percent, and the average return and standard deviation on Asset B are 4.2 percent and 3.6 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions. a. What is the probability that in any given year, the return on Asset A will be greater than 12 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the probability that in any given year, the return on Asset B will be greater than 12 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. In a particular year, the return on Asset A was −4.38 percent. How likely is it that such a low return will recur at some point in the future? (Do not round…arrow_forward1.) On a single chart, plot the value of $1 invested in each of the five indexes over time. I.e., for all ??, plot the cumulative return series for each index: ?????? = (1 + ?��1)(1 + ?��2)...(1 + ????) What patterns do you observe? (10 points) 2.) Plot a histogram of only the Global index returns. Does the distribution look normal? (5 points) 3.) Estimate the following for each of the indices. In calculating the statistics, “monthly” can be interpreted as “not annualized”. (30 points) a. Arithmetic average of monthly returns, and annualized arithmetic return using the APR method b. Geometric average of monthly returns, and annualized geometric return using the EAR method. Why does the geometric average differ from the arithmetic average? c. Standard deviation of monthly returns, and annualized standard deviation d. Sharpe Ratio of monthly returns, and annualized Sharpe Ratio e. Skewness of monthly returns f. Kurtosis of monthly returns g. 5% Value at Risk (VaR) of…arrow_forward
- Which one of the following is defined as the average compound return earned per year over a multiyear period? Multiple Choice A Geometric average return B Variance of returns C Standard deviation of returns D Arithmetic average return E. Normal distribution of returnsarrow_forwardGiven the following historical returns, calculate the average return and the standard deviation: Year Return 1 14% 2 10% 3 15% 4 11%arrow_forwardConsider the following time series: a. Construct a time series plot. What type of pattern exists in the data? Is there an indication of a seasonal pattern? b. Use a multiple linear regression model with dummy variables as follows to develop an equation to account for seasonal effects in the data: Qtr1 = 1 if quarter 1, 0 otherwise; Qtr2 = 1 if quarter 2, 0 otherwise; Qtr3 = 1 if quarter 3, 0 otherwise. c. Compute the quarterly forecasts for next year.arrow_forward
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