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Topic 6 Expert solutions(1).pdf

Topic 6 Expert solutions(1).pdf - Expert Solutions Topic 6...

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Expert Solutions Topic 6: Risk and Return Question 1 i) The dividend of $2 divided by the initial investment of $30. Dividend yield = 2/30 = 0.0666 or 6.67% ii) The share price grew by $5, divided by the initial investment. So $35 subtract $30. Capital gain yield = 5/30 = 0.16666 or 16.67% iii) The total return was $5 + $2 = $7, divided by the initial investment. Return = 7/30 = 0.23333 or 23.33% Question 2 The average return is the sum of the returns, divided by the number of returns. The average return for share X was: % . . . . . N x X N i i 11.40 or .1140 5 17 34 13 04 15 1 Remembering statistics, we calculate the variance of each share as: 1 1 2 2 N x x s N i i X Returns Ri - Rx (Ri-Rx)^2 0.15 0.036 0.001296 0.04 -0.074 0.005476 -0.13 -0.244 0.059536 0.34 0.226 0.051076 0.17 0.056 0.003136 Mean 0.114 Sum 0.12052 Var 0.03013 Std 0.17358 17.36% The standard deviation is the square root of the variance, so the standard deviation of each share is: s X = (.030130) 1/2 s X = .1736 or 17.36%
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Question 3 To find the return on the coupon bond, we first need to find the price of the bond today. Since
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