MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
15th Edition
ISBN: 9780134479903
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
Question
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Chapter 8, Problem 1OR
Summary Introduction

To discuss:

Annual average return and standard deviation.

Introduction:

Return: In financial context, return is seen as percentage that represents the profit in an investment.

Expert Solution & Answer
Check Mark

Explanation of Solution

The annual average return for each asset over the period can be calculated using the following formula

Annual average returns(r¯) =i=1n( Returns(Ri))n (1)

Using equation (1) the annual average return of Miller’s Fund (MF) is calculated as follows:

Annual average returns(rMF¯) =76+16.634.9+39.64=97.34=24.325%

The annual average return of Miller’s Fund (MF) is 24.325%..

Using equation (1) the annual average return of S&P is calculated as follows:

Expected returns(rS&P¯) =26.5+15.1+2.1+164=59.74=14.925%

The annual average return of S&P is 14.925%.

By the annual average returns, Miller’s Fund performed better than the S&P over the given period of time.

If money investment of $1,000 is made in Miller’s Fund in 2009, the money reaped at the end of 2012 would be $1,243.25 (Money at the end of 2012 =Investment ×(1+Return)=1,000×(1+0.24325)=1,000×1.24325=1,243.25 )

If money investment of $1,000 is made in S&P in 2009, the money reaped at the end of 2012 would be $1,149.25 (Money at the end of 2012 =Investment ×(1+Return)=1,000×(1+0.14925)=1,000×1.14925=1,149.25 )

The standard deviation of Miller’s Fund can be calculated as follows using excel functions as in table1.

Table 1

MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance, Chapter 8, Problem 1OR , additional homework tip  1

The standard deviation of Miller’s Fund is calculated as follows:

σMF=i=1n(ri-E(r))2(n-1)=0.647141=0.64713=0.2157=0.464435

The standard deviation of Miller’s Fund is 46.44%.

The standard deviation of S&P can be calculated as follows using excel functions as in table 2.

Table 2

MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance, Chapter 8, Problem 1OR , additional homework tip  2

The standard deviation of S&P is calculated as follows:

σ S&P = i=1 n ( r i -E(r) ) 2 (n-1) = 0.039615 41 = 0.039615 3 = 0.013205 =0.114913

The standard deviation of S&P is 11.5%.

By the value of standard deviation, Millers Fund is more volatile than S&P.

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Chapter 8 Solutions

MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance

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