Expected average annual dividends (2012-2014) Current stock price Expected future stock price (2014) Average current income (CI) Average capital gains (CG) Average value of the investment (VI) $ $ $ Approzimate Yield = Stock 1 $1.00 $55 $67 $ $ $ Using this formula, you can see that the approximate yield for Stock 1 is Stock 2 $2.70 Next, derive the correct formula for approximate yield by correctly arranging these three variables in the equation that f $117 $147 and the approximate yield for Sto True or False: For these investments to be equally attractive, Stock 2 must carry lower risk than Stock 1.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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How do I calculate those numbers

**Title: Investing in Stocks and Bonds: Understanding Returns**

**Ch 12: Assignment - Investing in Stocks and Bonds**

This section provides a practical understanding of calculating investment returns for stocks. Here’s a breakdown based on given data for two stocks over a period of three years.

**Stock Comparison Table (2012-2014):**

| Criteria                             | Stock 1 | Stock 2 |
|--------------------------------------|---------|---------|
| Expected average annual dividends    | $1.00   | $2.70   |
| Current stock price                  | $55     | $117    |
| Expected future stock price (2014)   | $67     | $147    |

To assess the investments, calculate the following:

1. **Average Current Income (CI)**: This is determined by the annual dividends.
2. **Average Capital Gains (CG)**: Calculated by the difference between the expected future stock price and the current stock price.
3. **Average Value of the Investment (VI)**: Average value considering the stock price movement and dividends.

**Approximate Yield Formula:**

\[ \text{Approximate Yield} = \frac{\text{Average Current Income (CI)} + \text{Average Capital Gains (CG)}}{\text{Average Value of the Investment (VI)}} \]

- Calculate and compare the approximate yields for both stocks.

**Exercise:**

Using this formula, determine:
- The approximate yield for Stock 1 is __________.
- The approximate yield for Stock 2 is __________.

**Discussion Question:**

*True or False*: For these investments to be equally attractive, Stock 2 must carry lower risk than Stock 1.

This table and formula will help you compare the potential returns on investment assets and understand the relationship between risk and return in stock investment.
Transcribed Image Text:**Title: Investing in Stocks and Bonds: Understanding Returns** **Ch 12: Assignment - Investing in Stocks and Bonds** This section provides a practical understanding of calculating investment returns for stocks. Here’s a breakdown based on given data for two stocks over a period of three years. **Stock Comparison Table (2012-2014):** | Criteria | Stock 1 | Stock 2 | |--------------------------------------|---------|---------| | Expected average annual dividends | $1.00 | $2.70 | | Current stock price | $55 | $117 | | Expected future stock price (2014) | $67 | $147 | To assess the investments, calculate the following: 1. **Average Current Income (CI)**: This is determined by the annual dividends. 2. **Average Capital Gains (CG)**: Calculated by the difference between the expected future stock price and the current stock price. 3. **Average Value of the Investment (VI)**: Average value considering the stock price movement and dividends. **Approximate Yield Formula:** \[ \text{Approximate Yield} = \frac{\text{Average Current Income (CI)} + \text{Average Capital Gains (CG)}}{\text{Average Value of the Investment (VI)}} \] - Calculate and compare the approximate yields for both stocks. **Exercise:** Using this formula, determine: - The approximate yield for Stock 1 is __________. - The approximate yield for Stock 2 is __________. **Discussion Question:** *True or False*: For these investments to be equally attractive, Stock 2 must carry lower risk than Stock 1. This table and formula will help you compare the potential returns on investment assets and understand the relationship between risk and return in stock investment.
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