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Chapter 10

# Chapter 10 - 1 Suppose a stock had an initial price of \$95...

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Suppose a stock had an initial price of \$95 per share, paid a dividend of \$2.00 per share during the year, and had an ending share price of \$114. Requirement 1: Compute the percentage total return. (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Percentage total return % Requirement 2: What was the dividend yield? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Dividend yield % Requirement 3: What was the capital gains yield? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Capital gains yield % Explanation: 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 = [(\$114 – 95) + 2.00] / \$95 R = 0.2211 or 22.11% 2: The dividend yield is the dividend divided by price at the beginning of the period price, so: Dividend yield = \$2.00 / \$95 Dividend yield = 0.0211 or 2.11% 3: And the capital gains yield is the increase in price divided by the initial price, so: Capital gains yield = (\$114 – 95) / \$95 Capital gains yield = 0.2000 or 20.00%
2. Using the following returns for X and Y. Returns Year X Y 1 21. 9 % 26. 7 % 2 16. 9 – 3.9 3 9.9 28. 7 4 19. 8 14. 8 5 4.9 32. 7 Requirement 1: Calculate the average returns for X and Y. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Average returns X % Y % Requirement 2: Calculate the variances for X and Y. (Round your answers to 6 decimal places (e.g., 32.161616).) Variances X Y Requirement 3: Calculate the standard deviations for X and Y. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Standard deviations X % Y %

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Explanation: 1: The average return is the sum of the returns, divided by the number of returns. The average return for each stock was: 2: Remembering back to "sadistics," we calculate the variance of each stock as: 3: The standard deviation is the square root of the variance, so the standard deviation of each stock is: σ X = (0.024141) 1/2 σ s X = 0.1554 or 15.54% σ Y = (0.046921) 1/2 3.
Consider the following table for a period of six years. Returns Year Large-Company Stocks U.S. Treasury Bills Year 1 – 14.99% 7.35% Year 2 – 26.56 8.02 Year 3 37.29 5.93 Year 4 23.99 5.37 Year 5 7.28 5.48 Year 6 6.63 7.73 Requirement 1: Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Arithmetic average returns Large company stock % T-bills % Requirement 2: Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Standard deviation Large company stock % T-bills % Requirement 3: Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. (a) What was the arithmetic average risk premium over this period? (Do not include the percent sign (%). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).) Risk premium % (b)

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What was the standard deviation of the risk premium over this period? (Do not include the percent sign (%).
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