Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 6, Problem 5MC
Summary Introduction
To determine: The monthly holding period return.
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You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each
stock under four different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below. Probability
0.1
0.2
0.4
0.3
a. Compute the expected return for stock X and for stock Y.
The expected return for stock X is
(Type an integer or a decimal. Do not round.)
Economic Condition
Recession
Slow growth
Moderate growth
Fast growth
Returns
Stock X Stock Y
- 40
30
80
150
- 110
40
140
210
2. Answer both questions: a. You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end. What is the rate of return on your investment if the year-end stock prices turn out to be $38, $40, and $42? What is your real (inflation-adjusted) rate of return in each case, assuming an inflation rate of 3%?
b. Consider the following information on the returns on stock and bond investment.
Scenario
Profitability
Stocks
Bonds
Recession
.2
-5%
+14%
Normal Economy
.6
+15%
+8%
Boom
.2
+25%
+4%
i) Calculate the expected rate of return and standard deviation in each investment.
ii) Do your results support or contradict the historical record on the relationship between risk and return in the financial market in both Canada and the United States?
iii) Which investment would you prefer? Explain your answer.
Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $35. At the end of year 1, you receive a $3 dividend, and buy one more share for $44. At the end of year 2, you receive total dividends of $6 (i.e., $3 for each share), and sell the shares for $50 each.
The time-weighted return on your investment is?
When performing the calculations, do not round any inputs or interim results until you get the final answer.
Round your final answer to four places after the decimal point.
The dollar-weighted return on your investment is?
When performing the calculations, do not round any inputs or interim results until you get the final answer.
Round your final answer to four places after the decimal point.
Chapter 6 Solutions
Foundations Of Finance
Ch. 6 - a. What is meant by the investors required rate of...Ch. 6 - Prob. 2RQCh. 6 - What is a beta? How is it used to calculate r, the...Ch. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - What effect will diversifying your portfolio have...Ch. 6 - (Expected return and risk) Universal Corporation...Ch. 6 - (Average expected return and risk) Given the...
Ch. 6 - (Expected rate of return and risk) Carter, Inc. is...Ch. 6 - (Expected rate of return and risk) Summerville,...Ch. 6 - Prob. 5SPCh. 6 - Prob. 9SPCh. 6 - Prob. 10SPCh. 6 - Prob. 11SPCh. 6 - Prob. 12SPCh. 6 - Prob. 14SPCh. 6 - (Capital asset pricing model) Using the CAPM,...Ch. 6 - Prob. 16SPCh. 6 - Prob. 17SPCh. 6 - a. Compute an appropriate rate of return for Intel...Ch. 6 - (Estimating beta) From the graph in the right...Ch. 6 - Prob. 20SPCh. 6 - Prob. 21SPCh. 6 - (Capital asset pricing model) The expected return...Ch. 6 - (Portfolio beta and security market line) You own...Ch. 6 - (Portfolio beta) Assume you have the following...Ch. 6 - Prob. 1MCCh. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - Prob. 5MCCh. 6 - Prob. 6MCCh. 6 - Prob. 7MCCh. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MC
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