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Ch 5 homework solutions

# Ch 5 homework solutions - BUSINESS FINANCE CHAPTER 5...

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BUSINESS FINANCE CHAPTER 5 HOMEWORK SOLUTIONS P5-1. (a) Investment X: Return - + = = (\$21,000 \$20,000 \$1,500) 12.50% \$20,000 Investment Y: Return - + = = (\$55,000 \$55,000 \$6,800) 12.36% \$55,000 (b) Investment X should be selected because it has a higher rate of return for the same level of risk. P5-9. a. Stock Price Variance Year Beginning End Returns (Return–Average Return) 2 2006 2007 2008 2009 14.36 21.55 64.78 72.38 21.55 64.78 72.38 91.80 50.07% 200.60% 11.73% 26.83% 0.0495 1.6459 0.3670 0.2068 b. Average return 72.31% c. Sum of variances 2.2692 3 Sample divisor ( n - 1) 0.7564 Variance 86.97% Standard deviation d. 1.20 Coefficient of variation e. The stock price of Apple has definitely gone through some major price changes over this time period. It would have to be classified as a volatile security having an upward price trend over the past 4 years. Note how comparing securities on a CV basis allows the investor to put the stock in proper perspective. The stock is riskier than what Mike normally buys but if he believes that Apple will continue to rise then he should include it. P5-11. a. Expected return: 1 n i ri i r r P = = × Rate of Return r i Probability P r i Weighted Value r i ×

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Ch 5 homework solutions - BUSINESS FINANCE CHAPTER 5...

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