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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Winter '09
 MARYHARDY
 Standard Deviation, Variance, Inflation

Click to edit the document details