Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
Question
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Chapter 8, Problem 1OR
Summary Introduction

To discuss: The annual average return and standard deviation.

Introduction:

In financial context, return is seen as percentage that represents the profit in an investment.

Expert Solution & Answer
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Explanation of Solution

Determine the annual average returns of MM fund:

Annual average returns can be computed by dividing sum of returns and number of years considered.

Annual average returns(r¯) =i=1n( Returns(Ri))n=76+16.634.9+39.64=97.34=24.325%

Hence, the annual average return of MM fund is 24.325%

Determine the expected return of Market index SP:

Annual average returns(r¯) =i=1n( Returns(Ri))n =26.5+15.1+2.1+164=59.74=14.925%

Hence, the annual average return of Market index SP is 14.925%.

Therefore, annual average return of MM fund is better than the annual average return of Market index SP over the given period of time.

Determine the money at the end of 2012 in MM fund:

It is calculated by multiplying the investment with the value attained by adding one with annual average return of MM fund.

Money at the end of 2012 =Investment ×(1+Return)=1,000×(1+0.24325)=1,000×1.24325=1,243.25 

Hence, the money at the end of 2012 in MM fund is $1,243.25.

Determine the money at the end of 2012 in Market index SP:

It is calculated by multiplying the investment with the value attained by adding one with annual average return of Market index SP.

Money at the end of 2012 =Investment ×(1+Return)=1,000×(1+0.14925)=1,000×1.14925=1,149.25

Hence, the money at the end of 2012 in MM fund is $1,149.25.

Compute standard deviation of MM fund:

YearReturnAverage returnReturn - Average return(Return - Average return)^2
200976.00%24.325%51.68%0.2670
201016.60%24.325%-7.73%0.0060
2011-34.90%24.325%-59.23%0.3508
201239.60%24.325%15.28%0.0233
Total0.6471

Computation of standard deviation:

Principles of Managerial Finance (14th Edition) (Pearson Series in Finance), Chapter 8, Problem 1OR , additional homework tip  1

The standard deviation of MM fund should be calculated as follows:

σMF=i=1n(ReturnAverage return)2(Number of years1)=0.647141=0.2157=0.464435

Hence, the standard deviation of MM fund is 46.44%

Compute standard deviation of Market index SP:

YearReturnAverage returnReturn - Average return(Return - Average return)^2
200926.50%14.925%11.58%0.0134
20105.10%14.925%-9.83%0.0097
20112.10%14.925%-12.83%0.0164
201216.00%14.925%1.08%0.0001
Total0.0396

Computation of standard deviation:

Principles of Managerial Finance (14th Edition) (Pearson Series in Finance), Chapter 8, Problem 1OR , additional homework tip  2

The standard deviation of Market index SP should be calculated as follows:

σMF=i=1n(ReturnAverage return)2(Number of years1)=0.039641=0.0132=0.1149

Hence, the standard deviation of Market index SP is 11.49%

Therefore, MM fund is more volatile than Market index SP according to the value of standard deviation.

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Chapter 8 Solutions

Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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