Solution About Chapter 10: Risk and Return: Lessons from Market History

Chapter 10: Risk and Return: Lessons from Market History

10.1 The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. The return of this stock is:

R = [($104 – 92) + 1.45] / $92

R = 0.1462 or 14.62%

10.2 Using the equation for total return, we find:

R = [($81 – 92) + 1.45] / $92

R = – 0.1038 or –10.38%

And the dividend yield and capital gains yield are:

Dividend yield = $1.45 / $92

Dividend yield = 0.0158 or 1.58%

Capital gains yield = ($81 – 92) / $92

Capital gains yield = – 0.1196 or –11.96%

Here’s a question for you: Can the dividend yield ever be negative?

No, that would mean you were paying the company for the privilege of owning the stock.

10.3 a. The total dollar return is the change in price plus the coupon payment, so:

Total dollar return = $1,056 – 1,090 + 80

Total dollar return = $46

b. The total nominal percentage return of the bond is:

R = [($1,056 – 1,090) + 80] / $1,090

R = 0.0422 or 4.22%

Notice here that we could have simply used the total dollar return of $46 in the numerator of this equation.

10.4 Using the Fisher equation, the real returns for government and corporate bonds were:

(1 + R) = (1 + r)(1 + h)

R denotes the nominal return, r denotes the real return, and h denotes the inflation rate

rG = 1.061/1.031 – 1

rG = 0.0291 or 2.91%

rC = 1.062/1.031 – 1

rC = 0.0301 or 3.01%

10.5 The average return is the sum of the returns, divided by the number of returns. The average return for each stock was:

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We calculate the variance of each stock as:

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The standard deviation is the square root of the variance, so the standard deviation of each stock is:

(X = (0.0051970)1/2

(X = 0.2270 or 22.70%

(Y = (0.054620)1/2

(Y = 0.2337 or 23.37%

10.6 We will calculate the sum of the...