Assignment_Ch 1_FIN 334

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Embry-Riddle Aeronautical University *

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Finance

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Jan 9, 2024

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Assignment 1_ Ch 1_ FIN 334 Name: Kanyika Mswia Please show your work clearly. Use excels as far as practicable. Except for inputs, please use cell names and formulas, do not hard code. 1. Suppose Sam bought 400 shares of XYZ stock at an initial price of $56 per share. The stock paid a dividend of $.42 per share during the following year, and the share price at the end of the year was $59. a. What is the capital gains yield? Capital Gains Yield = ($59 - $56) / $56 = $3 / $56 ≈ 0.0536 or 5.36% b. What is the dividend yield? Dividend Yield = $0.42 / $56 ≈ 0.0075 or 0.75% c. What is the total rate of return on the investment for Sam from this stock? Total Rate of Return = 5.36% + 0.75% = 6.11% 2. Your grandmother invested $1,200 in a stock 38 years ago. Currently, the value of her account is $320,000. What is his geometric return over this period? the geometric return for your grandmother's investment over 38 years is approximately 13.17%. 3. By observing 35 years of data, you have found an asset with an arithmetic average return of 13.20 percent and a geometric average return of 10.88 percent. What is your best estimate of the return of the asset over the next 5 years? 10 years? 20 years? A. For 5 years (T = 5): R(5) = (5-1)/(35-1)*10.88% + (35-5)/(35-1)*13.20% R(5) ≈ 11.64% B. For 10 years (T = 10): R(10) = (10-1)/(35-1)*10.88% + (35-10)/(35-1)*13.20% R(10) ≈ 12.45% C. For 20 years (T = 20): R(20) = (20-1)/(35-1)*10.88% + (35-20)/(35-1)*13.20% R(20) ≈ 12.91% Hint: Use Blume’s formula: Suppose we calculated arithmetic and geometric return averages from N years of data, then the T-year average return is given by 1

R ( T ) = T − 1 N − 1 ∗ Geomeric Average + N − T N − 1 ∗ Arithmetic Average 4. You are given the returns for the following three stocks: Year Stock A Stock B Stock C 1 6% 3% -22 % 2 6 5 20 3 7 6 15 4 5 7 9 5 6 6 6 Calculate the arithmetic return, geometric return, and standard deviation for each stock. 5. You bought a stock three months ago for $84.12 per share. The stock paid no dividends. The current share price is $92.35. a. What is the APR of your investment? APR = (($92.35 - $84.12) / $84.12) * (12 / 3) = ($8.23 / $84.12) * 4 = 0.0980 or 9.80% b. What is the EAR of your investment? EAR = (1 + 0.0980)^12 - 1 ≈ 1.1268 or 12.68% 6. Over the past four years, a stock produced returns of 12 percent, 24 percent, 5 percent, and −16 percent. What is the approximate probability that an investor in this stock will not lose more than 30 percent nor earn more than 41 percent in any one given year? Assume the stock returns follow normal distribution. There is an approximate 44.40% chance that an investor in this stock will not lose more than 30% nor earn more than 41% in any one given year. 7. The rates of return on Cherry Jalopies, Inc., stock over the last five years were 17 percent, 12 percent, −6 percent, 5 percent, and 10 percent. Over the same period, the returns on Straw Construction Company’s stock were 16 percent, 22 percent, −2 percent, 3 percent, and 12 percent. Calculate the variances and the standard deviations for Cherry and Straw. 2

The variance for Cherry Jalopies, Inc. is approximately 85.20, and the standard deviation is approximately 9.23%. The variance for Straw Construction Company is approximately 69.87, and the standard deviation is approximately 8.35%. Thank you 3

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