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# PS1 Answers - Answer Key to Problem Set#1 1 a(1 point The...

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Answer Key to Problem Set #1 1. a. (1 point) The capital gain is the appreciation of the stock price. Find the amount that Seth paid for the stock one year ago by dividing his total investment by the number of shares he purchased (\$52.00 = \$10,400 / 200). Because the price of the stock increased from \$52.00 per share to \$54.25 per share, he earned a capital gain of \$2.25 per share (=\$54.25 - \$52.00). Capital Gain = (P t+1 – P t ) (Number of Shares) = (\$54.25 - \$52.00) (200) = \$450 Seth’s capital gain is \$450. b. (1 point) The total dollar return is equal to the dividend income plus the capital gain. He received \$600 in dividend income, as stated in the problem, and received \$450 in capital gains, as found in part ( a ). Total Dollar Gain = Dividend income + Capital gain = \$600 + \$450 = \$1,050 Seth’s total dollar return is \$1,050. c. (1 point) The percentage return is the total dollar gain on the investment as of the end of year 1 divided by the initial investment of \$10,400. R t+1 = [Div t+1 + (P t+1 – P t )] / P t = [\$600 + \$450] / \$10,400 = 0.1010 The percentage return is 10.10%. b. (1 point) The dividend yield is equal to the dividend payment divided by the purchase price of the stock. Dividend Yield = Div 1 / P t = \$600 / \$10,400 = 0.0577 The stock’s dividend yield is 5.77%. 2. a. (2 point) Expected Return HB = (0.25)(-0.02) + (0.60)(0.092) + (0.15)(0.154) = 0.0733 = 7.33% The expected return on Highbull’s stock is 7.33%.

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Expected Return SB = (0.25)(0.05) + (0.60)(0.062) + (0.15)(0.074) = 0.0608 = 6.08% The expected return on Slowbear’s stock is 6.08%. b. (2 points) Variance A ( σ HB 2 ) = (0.25)(-0.02 – 0.0733) 2 + (0.60)(0.092 – 0.0733) 2 + (0.15)(0.154 – 0.0733) 2 = 0.003363 Standard Deviation A ( σ HB ) = (0.003363) 1/2 = 0.0580 = 5.80% The standard deviation of Highbear’s stock returns is 5.80%. Variance B ( σ SB 2 ) = (0.25)(0.05 – 0.0608) 2 + (0.60)(0.062 – 0.0608) 2 + (0.15)(0.074 – 0.0608) 2 = 0.000056 Standard Deviation B ( σ B ) = (0.000056) 1/2 = 0.0075 = 0.75% The standard deviation of Slowbear’s stock returns is 0.75%.
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