# Ch8.Answers - Chapter 8 Answers 1. Nominal rate = real rate...

This preview shows pages 1–2. Sign up to view the full content.

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

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.