vv-6 - Chapter 8 Answers 1 Nominal rate = real rate...

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Chapter 8 Answers 1. Nominal rate = real rate + inflation 2.25 + 1.75 = 4.00% 2. Real rate = nominal rate – inflation 4.5 – 4.25 = .25 3. Expected return: (.15 x -.02) + (.38 x .03) + (.30 x .04) + (.17 x .05) = 2.89% Standard deviation: (-.02 - .0289) 2 (.15) + (.03 - .0289) 2 (.38) + (.04 - .0289) 2 (.30) + (.05 - .0289 2 )(.17) = .00035868 + .00000046 + .00003696 + .00007569 = .00047179 sq. root (.00047179) = .0217 or 2.17% No, the security has greater risk than the T-bill (which has a standard deviation of 0) and a lower return. 4. Common stock 1 Expected return: (.30 x .10) + (.60 x .13) + (.10 x .16) = 12.4% Standard deviation: (.10 - .124) 2 (.30) + (.13 - .124) 2 (.60) + (.16 - .124) 2 (.10) = .0001728 + .0000216 + .0001296 = .000324 sq. root (.000324) = .018 or 1.8% Common stock 2 Expected return: (.20 x .04) + (.40 x .08) + (.30 x .18) + (.10 x .21) = 11.5% Standard deviation: (.04 - .115) 2 (.20) + (.08 - .115) 2 (.40) + (.18 - .115) 2 (.30) + (.21 - .115) 2 (.10) = .001125 + .00049 + .0012675 + .0009025 = .003785
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vv-6 - Chapter 8 Answers 1 Nominal rate = real rate...

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