FIN301(7E)CHAPTER10SOLUTIONS(2)

# FIN301(7E)CHAPTER10SOLUTIONS(2) - CHAPTER 10 Solutions to...

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CHAPTER 10 Solutions to Questions and Problems 5. The nominal return is the stated return, which is 11.70 percent. Using the Fisher equation, the real return was: (1 + R) = (1 + r)(1 + h) r = (1.1170)/(1.031) – 1 r = .0834 or 8.34% 8. We will calculate the sum of the returns for each asset and the observed risk premium first. Doing so, we get: Year Large co. stock return T-bill return Risk premium 1973 –14.69% 7.29% –21.98% 1974 –26.47% 7.99% –34.46% 1975 37.23% 5.87% 31.36% 1976 23.93% 5.07% 18.86% 1977 –7.16% 5.45% –12.61% 1978 6.57% 7.64% –1.07% Total 19.41% 39.31% –19.90% a . The average return for large company stocks over this period was: Large company stock average return = 19.41% /6 Large company stock average return = 3.24%

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And the average return for T-bills over this period was: T T-bills average return = 39.31% / 6 U T-bills average return = 6.55% b . Using the equation for variance, we find the variance for large company stocks over this period was: Variance = 1/5[(–.1469 – .0324) 2 + (–.2647 – .0324) 2 + (.3723 – .0324) 2 + (.2393 – .0324) 2 + (–.0716 – .0324) 2 + (.0657 – .0324) 2 ] Variance = 0.058136 And the standard deviation for large company stocks over this period was: Standard deviation = (0.058136) 1/2 Standard deviation = 0.2411 or 24.11% Using the equation for variance, we find the variance for T-bills over this period was: Variance = 1/5[(.0729 – .0655) 2 + (.0799 – .0655) 2 + (.0587 – .0655) 2 + (.0507 – .0655) 2 + (.0545 – .0655) 2 + (.0764 – .0655) 2 ] Variance = 0.000153 And the standard deviation for T-bills over this period was: Standard deviation = (0.000153)
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