CHAPTER 12
SOME LESSONS FROM CAPITAL
MARKET HISTORY
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this
solutions manual, rounding may appear to have occurred. However, the final answer for each problem is
found without rounding during any step in the problem.
Basic
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 = [($97 – 84) + 2.05] / $84 = .1792 or 17.92%
2.
The dividend yield is the dividend divided by price at the beginning of the period price, so:
Dividend yield = $2.05 / $84 = .0244 or 2.44%
And the capital gains yield is the increase in price divided by the initial price, so:
Capital gains yield = ($97 – 84) / $84 = .1548 or 15.48%
4.
The total dollar return is the increase in price plus the coupon payment, so:
Total dollar return = $920 – 940 + 60 = $40
The total percentage return of the bond is:
R = [($920 – 940) + 60] / $940 = .0426 or 4.26%
Notice here that we could have simply used the total dollar return of $40 in the numerator of this
equation.
Using the Fisher equation, the real return was:
(1 + R) = (1 + r)(1 + h)
r = (1.0426 / 1.04) – 1 = .0025 or 0.25%
8.
We will calculate the sum of the returns for each asset and the observed risk premium first. Doing
so, we get:
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CHAPTER 12
Year
Large co. stock return
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 Spring '08
 LAYISH
 Standard Deviation, Variance, Inflation, Mean

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