Chapter 6 Ch 06 P14 Build

Chapter 6. Ch 06 P14 Build a Model

a. Use the data given to calculate annual returns for Bartman, Reynolds, and the Market Index, and then calculate average returns over the five-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2005 because you do not have 2004 data.)

Data as given in the problem are shown below:

Bartman Industries
Reynolds Incorporated
Market Index

Year
Stock Price
Dividend
Stock Price
Dividend
Includes Divs.

2010
$17.250
$1.150
$48.750
$3.000
11,663.98

2009
14.750
1.060
52.300
2.900
8,785.70

2008
16.500
1.000
48.750
2.750
8,679.98

2007
10.750
0.950
57.250
2.500
6,434.03

2006
11.375
0.900
60.000
2.250
5,602.28

2005
7.625
0.850
55.750
2.000
4,705.97

We now calculate the rates of return for the two companies and the index:

Bartman
Reynolds
Index

2010
-9.2%
12.5%
-32.8%

2009
17.0%
-1.3%
-1.2%

2008
-44.2%
19.7%
-34.9%

2007
13.8%
8.8%
-14.8%

2006
-37.4%
-3.6%
-19.0%

Average
-12.0%
7.2%
-20.6%

Note: To get the average, you could get the column sum and divide by 5, but you could also use the function wizard, fx. Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for Bartman and then copy the cell for the other items.

b. Calculate the standard deviation of the returns for Bartman, Reynolds, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

Use the function wizard to calculate the standard deviations.

Bartman
Reynolds
Index

Standard deviation of returns
28.3%
9.7%
13.8%