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Unformatted text preview: Investments, Chapter 5 Answers to Selected Problems 8. During a period of severe ination, a bond oered a nominal HPR of 80 percent per year. The ination rate was 70 percent per year. a . What was the real HPR on the bond over the year? Answer: Let r denote the nominal return on the bond and let i denote the ination rate. Then the real HPR is given by 1 + r 1 + i-1 = 1 . 80 1 . 70-1 = 5 . 88% . b . Compare this real HPR to the approximation R = r-i . Answer: With the approximation, we get R = r-i = 80%-70% = 10% . Clearly, R = r-i is not a good approximation for large values of r and i . Use Table 1 to answer problems 9 through 11. Bear Market Normal Market Bull Market Probability 0.2 0.5 0.3 Stock X-20% 18% 50% Stock Y-15% 20% 10% Table 1: Table for problems 9 through 11. 1 9. What is the expected return for stocks X and Y ? Answer: The expected return for stock X is E [ r X ] = . 2 (-20%) + . 5 18% + . 3 50% = 20% . The expected return for stock Y is E [ r Y ] = . 2 (-15%) + . 5 20% + . 3 10% = 10% ....
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This note was uploaded on 03/01/2012 for the course FINANCE 780 taught by Professor Scott during the Spring '12 term at Missouri State University-Springfield.
- Spring '12