Topic 2

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TOPIC 1

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

Assume you bought 100 shares of NewTech common stock on January 15, 2003 at $50.00 per share and sold it on January 15, 2004 for $40.00 per share.

1What was your holding period return?

2What was your holding period yield?

USE THE FOLLOWING INFORMATION OR THE NEXT TWO PROBLEMS

Suppose you bought a GM corporate bond on January 25, 2001 for $750, on January 25, 2004 sold it for $650.00.

3What was your annual holding period return?

4What was your annual holding period yield?

USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMS

The common stock of XMen Inc. had the following historic prices.

TimePrice of X-Tech
3/01/199950.00
3/01/200047.00
3/01/200176.00
3/01/200280.00
3/01/200385.00
3/01/200490.00

5What was your holding period return for the time period 3/1/1999 to 3/1/2004?

6What was your annual holding period yield (Annual HPY)?

7What was your arithmetic mean annual yield for the investment in XMen Industries.

8What was your geometric mean annual yield for the investment in XMen?

USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS

You have concluded that next year the following relationships are possible:

Economic StatusProbabilityRate of Return
Weak Economy.15-5%
Static Economy.605%
Strong Economy.2515%

9What is your expected rate of return [E(Ri)] for next year?

10Compute the standard deviation of the rate of return for the one year period.

11Compute the coefficient of variation for your portfolio.

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

Assume that during the past year the consumer price index increased by 1.5 percent and the securities listed below returned the following nominal rates of return.

U.S. Government T-bills2.75%
U.S. Long-term bonds4.75%

12What are the real rates of return for each of these securities?

13If next year the real rates all rise by 10 percent while inflation climbs from 1.5 percent to 2.5 percent, what will be the nominal rate of return on each security?

14If over the past 20 years the annual returns on the S&P 500 market index averaged 12% with a standard deviation of 18%, what was the coefficient of variation?
15Given investments A and B with the following risk return characteristics, which one would you prefer and why?
Standard Deviation
InvestmentExpected Returnof Expected Returns
A 12.2%7%
B8.8%5%

USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS

You are provided with the following information
Nominal return on risk-free asset = 4.5%
Expected return for asset i = 12.75%
Expected return on the market portfolio = 9.25%

16Calculate the risk premium for asset i

17Calculate the risk premium for the market portfolio

USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMS

Consider the following information

Nominal annual return on U.S. government T-bills for year 2000 = 3.5% Nominal annual return on U.S government long-term bonds for year 2000 = 4.75% Nominal annual return on U.S. large-cap stocks for year 2000= 8.75% Consumer price index January 1, 2000 = 165

Consumer price index December 31, 2000 = 169

18Compute the rate of inflation for the year 2000

19Calculate the real rate of return for U.S. T-bills

20Calculate the real rate of return for U.S. long-term bonds

21Calculate the real rate of return for U.S. large-cap stocks

USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMS

Assume that you hold a two stock portfolio. You are provided with the following information on your holdings

Stock
Shares
Price(t)
Price(t+1)
1
15
10
12
2
25
15
16

22Calculate the HPY for stock 1

23Calculate the HPY for stock 2

24Calculate the market weights for stock 1 and 2 based on period t values

25Calculate the HPY for the portfolio

ANSWERS TO PROBLEMS

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