To critically think about: The type of average return that the investor should use to forecast the stock market prices for the next one year. Introduction: Total return refers to the total income from an investment. The total income includes the periodic incomes and the increase or decrease in the value of an asset. Average returns refer to the returns that the investments earn in a typical year. Arithmetic average return refers to the returns that an investment earns in an average year over different periods. Geometric average return refers to the return per year after compounding the average returns for multiple years.

Question

Want to see the full answer?

Answer 1

Question

Chapter 12.5, Problem 12.5ACQ

Summary Introduction

To critically think about: The type of average return that the investor should use to forecast the stock market prices for the next one year.

Introduction:

Total return refers to the total income from an investment. The total income includes the periodic incomes and the increase or decrease in the value of an asset.

Average returns refer to the returns that the investments earn in a typical year.

Arithmetic average return refers to the returns that an investment earns in an average year over different periods. Geometric average return refers to the return per year after compounding the average returns for multiple years.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

What are the implications of missing a credit card payment in finance?

Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level 100 Current U.S. price level 105 Current South African price level 111 Base rand spot exchange rate $ 0.188 Current rand spot exchange rate $ 0.171 Expected annual U.S. inflation 7% Expected annual South African inflation 5% Expected U.S. one-year interest rate 10% Expected South African one-year interest rate 8% Required: a. The current ZAR spot rate in USD that would have been forecast by PPP.Note: Do not round intermediate calculations. Round your answer to 4 decimal places. b. Using the IFE, the expected ZAR spot rate in USD one year from now.Note: Do not round intermediate calculations. Round your answer to 4 decimal places. c. Using PPP, the expected ZAR spot rate in USD four years from now.Note: Do not round intermediate calculations.…

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR11,000. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,300, 4,300, 5,290, 6,280, and 7,250. The parent firm's cost of capital in dollars is 9,5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75. Required:. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. - NPV in USD using fisher effect Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. - NPV in USD using PPP rates Are the two USD NPs different or the same? What is the NPV in dollars if the actual pattern of ZAR per…