Solutions_Ch12 - CHAPTER 12 SOME LESSONS FROM CAPITAL...

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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 T-bill return Risk premium 1970 3.94% 6.50% - 2.56% 1971 14.30 4.36 9.94 1972 18.99 4.23 14.76 1973 –14.69 7.29 –21.98 1974 –26.47 7.99 –34.46 1975 37.23 5.87 31.36 33.30 36.24
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This note was uploaded on 09/08/2009 for the course FIN 311 taught by Professor Layish during the Spring '08 term at Binghamton University.

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Solutions_Ch12 - CHAPTER 12 SOME LESSONS FROM CAPITAL...

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