FIN 550 Week 3 Homework A+++++++

FIN 550 Week 3 Homework Chapter 3  Problems 3 4 and 5  Chapter 7: Problems 3(a-d), 7(a-e), and 8 • 

Chapter 3 • • • • 3. Using published sources (for example, The Wall Street Journal,Barron-, Federal Reserve Bulletin), look up the exchange rate for U. S.dollars with Japanese yen for each of the past 10 years (you can use an averagefor the year or a specific time period each year). Based on these exchangerates, compute and discuss the yearly exchange rate effect on an investment inJapanese stocks by a U. S. investor. Discuss the impact of this exchange rateeffect on the risk of Japanese stocks for a U. S. investor. • • • • 4. The following information is available concerning thehistorical risk and return relationships in the U. S. capital markets: • • • • U.S. CAPITAL MARKETS TOTAL ANNUAL RETURNS, 1990- 2011 • Investment Category Arithmetic Mean Geometric Mean Standard Deviation of Returna Common Stocks 10.28% 8.81% 16.9% Treasury Bills 3.54 3.49 3.2 Long-term government bonds 5.10 4.91 6.4 Long-term corporate bonds 5.95 5.65 9.6 Real estate 9.49 9.44 4.5 • • • • aBased onarithmetic mean. • • • • a. Explain why the geometric and arithmetic mean returns are notequal and whether one or the other may be more useful for investmentdecision-making. • • • • b. For the time period indicated, rank these investments on arelative basis using the coefficient of variation from most to least desirable.Explain your rationale. • • • • c. Assume the arithmetic mean returns in these series are normallydistributed. Calculate the range of returns that an investor would haveexpected to achieve 95 percent of the time from holding common stocks. • • • • 5. You are given the following long- run annual rates of returnfor alternative investment instruments: • • • U.S. Government T-bills 3.50% Large-cap common stock 11.75 Long-term corporate bonds 5.50 Long-term government bonds 4.90 Small-capitalization common stock 13.10 • • • • The annual rate of inflation during this period was 3 percent.Compute the real rate of return on these investment alternatives. • • Chapter 7 • • • • 3. The following are the monthly rates of return for MadisonCookies and for Sophie Electric during a six- month period. • • • Month Madison Cookies Sophie Electric 1 -0.04 0.07 2 0.06 -0.02 3 -0.07 -0.10 4 0.12 0.15 5 -0.02 -0.06 6 0.05 0.02 • • • • Compute the following. • • a. Average monthly rate of return Ri for each stock • • b. Standard deviation of returns for each stock • • c. Covariance between the rates of return • • d. The correlation coefficient between the rates of return. Whatlevel of correlation did you expect? How did your expectations compare with thecomputed correlation? Would these two stocks be good choices fordiversification? Why or why not? • • • • 7. The following are monthly percentage price changes for fourmarket indexes. • • • Month DJIA S&P 500 Russell 2000 Nikkei 1 0.03 0.02 0.04 0.04 2 0.07 0.06 0.10 -0.02 3 -0.02 -0.01 -0.04 0.07 4 0.01 0.03 0.03 0.02 5 0.05 0.04 0.11 0.02 6 -0.06 -0.04 -0.08 0.06 • • • • Compute the following. • • a. Average monthly rate of return for each index • • b. Standard deviation for each index • • c. Covariance between the rates of return for the followingindexes: • • d. The correlation coefficients for the same four combinations • • e. Using the answers from parts (a), (b), and (d), calculate theexpected return and standard deviation of a portfolio consisting of equal partsof (1) the S&P and the Russell 2000 and (2) the S&P and the Nikkei.Discuss the two portfolios. • • • • 8. The standard deviation of Shamrock Corp. stock is 19 percent.The standard deviation of Cara Co. stock is 14 percent. The covariance betweenthese two stocks is 100. What is the correlation between Shamrock and Carastock? • •