Chapter 1 Problems 5a, 7, 9, And 125 During The Past Five Ye

Question

Chapter 1 Problems 5a D 7 9 And 125 During The Past Five Years Chapter 1: Problems 5(a-d), 7, 9, and 125. During the past five years, you owned two stocks with the following annual rates of return: Year Stock T Stock B 1 0.19 0.08 0.03 3 -0.12 -0.09 4 -0.03 0.15 0.04. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure? Compute the standard deviation of the annual rate of return for each stock. By this measure, which is the preferable stock? Compute the coefficient of variation for each stock. By this relative measure of risk, which stock is preferable? Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock. Discuss the differences in the mean returns relative to the standard deviation of the return for each stock. A stockbroker calls you and suggests that you invest in the Lauren Computer Company. After analyzing the firm’s annual report and other material, you believe the distribution of expected rates of return is as follows: Possible Rate of Return Probability -0.60 0.05 -0.30 0.20 -0.10 0.10 0.20 0.30 0.40 0.20 0.80 0.15. Compute the expected return [E(Ri)] on Lauren Computer stock. During the past year, your portfolio contained U.S. government T-bills, long-term government bonds, and common stocks. The rates of return were U.S. government T-bills 5.50%, U.S. government long-term bonds 7.50%, and U.S. common stocks 11.60%. The consumer price index went from 160 to 198, so compute the rate of inflation during that year. Then, calculate the real rates of return on each of these investments based on the inflation rate. Assume a required rate of return of 14% on common stocks, with an expected inflation of 5% and an estimated long-term real growth rate of 3%. What interest rate would you expect on U.S. government T-bills? What risk premium for common stocks is implied by this data?

Dr. Jack HW Helper · Accepted Answer

Introduction Investing in stocks and understanding the associated risks and returns are fundamental aspects of personal finance and investment management. This paper analyzes various investment scenarios over the past years, including stock returns, expected returns, inflation effects, and risk measures. Through these calculations, we gain insight into the desirability of stocks, the impact of inflation on real returns, and the estimation of risk premiums essential for making informed investment decisions. Analysis of Stock Returns (Items 5a-d) The arithmetic mean annual return provides a straightforward average of yearly returns, serving as a basic measure of expected performance. For Stock T, the sum of returns over five years is 0.19 + (-0.12) + (-0.03) + ... which totals approximately 0.02, resulting in an average of about 0.004 or 0.4%. Similarly, Stock B’s average return is calculated to assess its historical performance. The standard deviation measures the volatility or risk of the stocks’ returns. Calculations reveal that Stock T exhibits a higher or lower standard deviation compared to Stock B, indicating its relative riskiness. The coefficient of variation normalizes the risk by dividing the standard deviation by the mean return, providing a risk per unit of return. Stocks with lower coefficients are generally more desirable, balancing risk and reward. Lastly, the geometric mean return considers compound growth, often providing a more accurate picture of long-term investment performance compared to the arithmetic mean. The differences between these averages highlight the impact of variability and the importance of considering multiple risk and return metrics. Expected Return Calculation (Item 7) The expected return for Lauren Computer stock is computed by multiplying each possible return by its probability and summing these products: E(Ri) = Σ [Probability × Return]. This calculation yields an expected return that reflects the average anticipated performan

Chapter 1 Problems 5a, 7, 9, And 125 During The Past Five Ye

Chapter 1 Problems 5a D 7 9 And 125 During The Past Five Years

Sample Paper For Above instruction

Introduction

Analysis of Stock Returns (Items 5a-d)

Expected Return Calculation (Item 7)

Inflation Adjustment and Real Rate of Return (Item 9)

Estimating T-Bill Rates and Risk Premium (Item 6)

Conclusion

References