This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: CHAPTER 6 Risk and Rates of Return Homework Solutions ANSWERS TO END-OF-CHAPTER QUESTIONS 6-1. Data have been compiled by Ibbotson and Sinquefield on the actual returns for the following portfolios of securities from 1926-2002. 1. U.S. Treasury bills 2. U.S. government bonds 3. Corporate bonds 4. Common stocks for large firms 5. Common stocks for small firms Investors historically have received greater returns for greater risk-taking with the exception of the U.S. government bonds. Also, the only portfolio with returns consistently exceeding the inflation rate has been common stocks. 6.2 When a rate of interest is quoted, it is generally the nominal or, observed rate. The real rate of interest represents the rate of increase in actual purchasing power, after adjusting for inflation. Consequently, the nominal rate of interest is equal to the sum of the real rate of interest, the inflation rate, and the product of the real rate and the inflation rate. 6-3 The relationship between a debt security’s rate of return and the length of time until the debt matures is known as the term structure of interest rates or the yield to maturity. In most cases, longer terms to maturity command higher returns or yields. 6-4. (a) The investor's required rate of return is the minimum rate of return necessary to attract an investor to purchase or hold a security....
View Full Document
This note was uploaded on 02/20/2010 for the course FIN 565 taught by Professor Libnitz during the Spring '10 term at Academy of Design Tampa.
- Spring '10