FIN 550 Week 1 Homework

FIN 550 Week 1 Homework • Chapter 1: Problems 5(a-d), 7, 9, and 12 • Chapter 2: Problems 4(a-b), 5(a-b), and 6(a-b) • •Chapter 1:Problems 5(a-d), 7, 9, and 12 • • 5. During thepast five years, you owned two stocks that had the following annual rates of • • return: • • Year StockT Stock B • • 1 0.19 0.08 • • 2 0.08 0.03 • • 3 −0.12 −0.09 • • 4 −0.03 0.02 • • 5 0.15 0.04 • • • • a. Compute thearithmetic mean annual rate of return for each stock. Which stock is • • most desirable by thismeasure? • • b. Compute thestandard deviation of the annual rate of return for each stock. (Use • • Chapter 1 Appendix ifnecessary.) By this measure, which is the preferable stock? • • c. Compute thecoefficient of variation for each stock. (Use the Chapter 1 Appendix if • • necessary.) By thisrelative measure of risk, which stock is preferable? • • d. Compute thegeometric mean rate of return for each stock. Discuss the difference • • between the arithmeticmean return and the geometric mean return for each stock. • • Discuss thedifferences in the mean returns relative to the standard deviation of the • • return for each stock. • • • • 7. A stockbroker callsyou and suggests that you invest in the Lauren Computer Company. • • After analyzing thefirm- annual report and other material, you believe that the distribution • • of expected rates ofreturn is as follows: • • LAUREN COMPUTER CO. • • Possible Rate ofReturn 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 expectedreturn [E(Ri)] on Lauren Computer stock. • • • • 9- During the past year,you had a portfolio that contained U.S. government T-bills, longterm • • government bonds, andcommon stocks. The rates of return on each of them were • • as follows: • • U.S. governmentT-bills 5.50% • • U.S. governmentlong-term bonds 7.50 • • U.S. common stocks11.60 • • During the year, theconsumer price index, which measures the rate of inflation, went • • from 160 to 172 (1982- 1984 = 100). Compute the rate of inflation during this year. • • Compute the real ratesof return on each of the investments in your portfolio based on • • the inflation rate. • • 12. Assumethat the consensus required rate of return on common stocks is 14 percent. In • • addition, youread in Fortune that the expected rate of inflation is 5 percent and the • • estimatedlong-term real growth rate of the economy is 3 percent. What interest ratewould you expect on U.S. government T-bills? What is the approximate riskpremium for • • common stocksimplied by these data? • • •Chapter 1:Problems 5(a-d), 7, 9, and 12 • • •Chapter 2:Problems 4(a-b), 5(a-b), and 6(a-b) • • 4. a. Someonein the 36 percent tax bracket can earn 9 percent annually on her investments • • in atax-exempt IRA account. What will be the value of a one-time $10,000 investment • • in 5 years? 10years? 20 years? • • b. Suppose thepreceding 9 percent return is taxable rather than tax-deferred and the taxes • • are paid annually.What will be the after-tax value of her $10,000 investment after 5, 10, • • and 20 years? • • 5. a. Someonein the 15 percent tax bracket can earn 10 percent on his investments in ataxexempt • • IRA account.What will be the value of a $10,000 investment in 5 years? 10 • • years? 20years? • • b. Suppose thepreceding 10 percent return is taxable rather than tax-deferred. What will • • be theafter-tax value of his $10,000 investment after 5, 10, and 20 years? • • 6. Assume thatthe rate of inflation during all these periods was 3 percent a year. Compute • • the real valueof the two tax-deferred portfolios in problems 4a and 5a. •