Pfin (book Only)
6th Edition
ISBN: 9781337117029
Author: Billingsley, Randy; Joehnk, Michael D.; Gitman, Lawrence J.
Publisher: Cengage Learning
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Textbook Question
Chapter 12, Problem 1FPE
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns.
- a. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share).
- b. Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero).
- c. Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).
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Students have asked these similar questions
WINNER plans to invest in one of two stocks, each of which requires the same initial investment. The estimated return (cash flow) of these investments for the next year depends on economic conditions and their respective possibilities.
State of
Economy
Probability
Rate of Return
Stock A
Stock B
Boom
0.15
0.30
0.25
Normal
0.55
0.12
0.08
Recession
0.30
0.01
-0.05
i) Compute expected rate of return for each asset.
ii) Compute variance and standard deviation of rate of return for each asset.
iii) Which asset should they purchase?
An investor has an investment that has produced the following returns: Year 1: 10%, Year 2:
5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. Calculate the arithmetic mean return on this
investment.
O 6.75
O 17.00
3.40
8.50
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities.
Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment:
Stocks
Bonds
Commodities
Probability Return Probability Return Probability Return
20%
15%
0.15
20%
0.6
10%
0.2
0.2
12.5%
0.4
7.5%
0.2
0.25
0.2
0.4
3.8%
0.2
0.2
0%
To maximize your expected return, you should choose
O A. commodities.
B. bonds.
OC. stocks.
OD. All of the portfolios have the same expected return
Chapter 12 Solutions
Pfin (book Only)
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