Chapter_01web

Chapter_01web - EXERCISES FOR CHAPTER 1 With Solutions...

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EXERCISES FOR CHAPTER 1 With Solutions Exercise 1 . At the beginning of 2002, the shares of General Motors Corporation traded at \$60 each, and closed the year in December at \$40. GM paid a \$2.00 dividend on each share during the year. a. What was the rate of return that shareholders earned on GM shares during 2002? b. The yield on long-term US Treasuries at the beginning of 2002 was 5% and you require a 5% risk premium for this stock. What is your required rate of return (the beta return)? c. Using this required rate of return, what is the abnormal rate of return return (alpha) for the year? (Refer to Box 1.1. See also p. 44) Solution a. Return = (40 – 60 + 2) = -18 (returns are capital gain (loss) plus dividends) Rate of return = -18/60 = -30% b. Required return = Risk free return + risk premium = 5% + 5% = 10% The risk premium might be calculated with an “asset pricing model” (a beta technology), like the Capital Asset Pricing Model. c.

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This note was uploaded on 10/07/2010 for the course ECTCS ec12947322 taught by Professor Johnathayeri during the Spring '10 term at Life.

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Chapter_01web - EXERCISES FOR CHAPTER 1 With Solutions...

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