Ross5eChap10sm

Ross5eChap10sm - Chapter 10: Risk and Return: Lessons from...

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Chapter 10: Risk and Return: Lessons from Market History 10.2 a. The capital gain is the appreciation of the stock price. Find the amount that Seth paid for the stock one year ago by dividing his total investment by the number of shares he purchased ($62.50 = $12,500 / 200). Because the price of the stock increased from $62.50 per share to $69.75 per share, he earned a capital gain of $7.25 per share (=$69.75 – $62.50). Capital Gain = (P t+1 – P t ) (Number of Shares) = ($69.75 – $62.50) (200) = $1,450 Seth’s capital gain is $1,450 . b. The total dollar return is equal to the dividend income plus the capital gain. He received $750 in dividend income, as stated in the problem, and received $1,450 in capital gains, as found in part (a). Total Dollar Gain = Dividend income + Capital gain = $750 + $1,450 = $2,200 Seth’s total dollar return is $2,200 . c. The percentage return is the total dollar gain on the investment as of the end of year 1 divided by the initial investment of $12,500. R R t+1 = [Div t+1 + (P t+1 – P t )] / P t = [$750 + $1,450] / $12,500 = 0.176 The percentage return is 17.60%. b. The dividend yield is equal to the dividend payment divided by the purchase price of the stock. Dividend Yield = Div 1 / P t = $750 / $12,500 = 0.06 The stock’s dividend yield is 6.00%. 10.4 To find the real return we need to use the Fisher equation. Re–writing the Fisher equation to solve for the real return, r, in terms of the nominal return, R, and the expected inflation, π , we get: r = [(1 + R) / (1 + π )] – 1 Year T–bill return Inflation Real return Year T–bill Return Inflation Real Return 1973 9.36 4.78 4.37 Answers to End–of–Chapter Problems B–121
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This note was uploaded on 09/18/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.

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Ross5eChap10sm - Chapter 10: Risk and Return: Lessons from...

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