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Unformatted text preview: FNAN 301 Test bank problems – risk and return 1. A stock had returns of 9.0%, 3.0%, -7.0%, and 7.0% over the past four years. a. What was the arithmetic mean annual return? b. What was the compound annual return? 2. A stock had returns of 5%, 8%, -3%, 10%, and 7% over the past five years. a. What was its arithmetic average return? b. What was its geometric return? 3. Over the past 4 years, McDulles stock has had the following returns: 18%, -22%, 4%, and 14%. What is the arithmetic average return of the stock over the past 4 years minus the geometric average return of the stock over the past 4 years? Note that the arithmetic average return is sometimes referred to as the arithmetic mean return and that the geometric average return is sometimes referred to as the geometric mean return or compound return. (Spring 2010, final, question 11) 4. A stock had returns of -23%, 12%, and -25% in each of the past three years. Over the past four years, the arithmetic average annual return for the stock was 2.0%. What was the geometric return for the stock over the past four years? Note that individual stock returns are only given for each of the past three years, but that the question asks about the geometric return over the past four years. (Summer C 2010, quiz 4, question 3) (Summer C 2010, final, question 18) (Fall 2010, quiz 4, question 8) (Fall 2010, final, question 15) 5. Amazon has never paid any dividends. Eleven years ago, the firm’s stock was selling for $7.88 per share. Today the stock is priced at $78.96. What was the compound return over the past 11 years? 6. Fargo stock had the following returns over the eight-year period between January 1, 2003, and December 31, 2010: geometric average annual rate of return of 9 percent and arithmetic average annual rate of return of 10 percent. If the market value of an investor’s shares at the beginning of 2003 was $1,000,000 and the stock paid no dividends over the period, then what was the market value of the shares at the end of 2010? If there is insufficient information to answer the question, write “insufficient information” as your answer. Assume that the investor did not buy or sell any shares during the relevant period. 1 FNAN 301 Test bank problems – risk and return 7. Twenty-five years ago, you invested $100 in stock A, $100 in stock B, $100 in stock C, and $100 in stock D. None of the four stocks has paid any dividends over the past 30 years. Based on the information given in the problem and the following table, which investment would be worth the most today? Stock Arithmetic average return over the past 25 years Geometric average return over the past 25 years Highest annual return in any 1 of the past 25 years Standard deviation of returns over the past 25 years A 19% 18% 28% 11% B 7% 3% 44% 28% C 21% 16% 40% 25% D 10% 9% 50% 17% A. Today, your investment in stock A would be worth more than your investment in any of the other 3 stocks B. Today, your investment in stock B would be worth more than your investment in any of the other B....
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- Spring '09
- Capital Asset Pricing Model