1. Calculating Returns
Suppose a stock had an initial price of $84 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $96. Compute the percentage total return.
The percentage total return is (96-84+1,40)/84=0,1595=15,95%
2. Calculating Yields
In Problem 1, what was the dividend yield? The capital gains yield?
Capital gain yield: (96-84)/84=0,1429=14,29%
Dividend yield: 1,40/84=0,167=1,67%
3. Calculating Returns and Variability
You’ve observed the following returns on Yasmin Corporation’s stock over the past ﬁve years: 19 percent, -13 percent, 24 percent, 31 percent, and 8 percent.
a. What was the arithmetic average return on ...view middle of the document...
Large company stocks :(-14.69-26.47-37.23+23.93-7.16+6.57)/6 = 3.24%
T-Bills: (7.29+7.99+5.87+5.07+4.54+7.64) /6= 6.55%
large company standard deviation: 24,11
t bills standard deviation: 1,23
-14.69-7.29) + (-26.47-7.99) + (37.23 – 5.87) + (23.93 – 5.07) + (-7.16 – 5.45) + (6.57- 7.64) = -19.9%
Arithmetic average risk premium: -19.90/6= -3.32%
Standard deviation of the risk premium: 24.91
6. Systematic versus Unsystematic Risk
Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.’s stock to change price. Provide a rationale for each response.
a. The government announces that inﬂation unexpectedly jumped by 2 percent last month.
Since it is an unexpected systematic event, prices will be most likely to drop.
b. Big Widget’s quarterly earnings report, just issued, generally fell in line with analysts’ expectations.
Since this is an expected event, the price will remain constant.
c. The government reports that economic growth last year was at 3 percent, which generally agreed with most economists’ forecasts.
Since new intel are in line with the previous forecasts, price will remain constant.
d. The directors of Big Widget die in a plane crash.
Since the event couldn’t be expected and would change the general direction of the company, the price will be likely to drop.
e. Congress approves changes to the tax code that will increase the top marginal corporate tax rate. The legislation had been debated for the previous six months.
In this case, the market is aware of the arriving tax change, so the price should already be adjusted before the law pass.
7. Calculating Returns and Standard Deviations
Based on the following information, calculate the expected return and standard deviation for the two stocks.
State of Economy
Probability of state of economy
Rate of Return if State Occurs
Expected return of Stock A
(0.15 x 0.03) + (0.50 x 0.07) + (0.35 x 0.11) = 0.0045 + 0.035 + 0.0385= 0.078 which is 7.8%
Expected return of Stock B
(0.15 x -0.20) + (0.50 x 0.13) + (0.35 x 0.33) = -0.03 + 0.065 + 0.1155= 0.1505 which is 15.05%
8. Systematic versus Unsystematic Risk
Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case? Provide a rationale for each response.
a. Short-term interest rates increase unexpectedly. This is a systematic risk since all rates will increase and will affect every companies.
b. The interest rate a company pays on its short-term debt borrowing is increased by its bank. This is an unsystematic risk since only the company is affected.
c. Oil prices unexpectedly decline. In this case, the classification can be seen as ambiguous since the oil...