A compute expected rate of return for each copier b

(a) Compute expected rate of return for each copier.
(b) Compute variance and standard deviation of rate of return for each copier.
(c) Which copier should they purchase?
Answer
:
Topic
:
Expected Return and Standard Deviation (Equation 5.2 and 5.3)
Question
Status:
Previous Edition
33

41)
Given the following probability distribution for assets X and Y, compute the expected rate of
return, variance, standard deviation, and coefficient of variation for the two assets. Which
asset is a better investment?
0.63
Topic
:
Expected Return, Standard Deviation and Coefficient of Variation (Equation 5.2, 5.3, and 5.4)
Question
Status:
Previous Edition
42)
Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002.
He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the
end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his
stock for $18.00 per share. What was Nico's realized holding period return? What was
Nico's compound annual rate of return? Explain the difference?
Compound Return:
34

$24 = $2/ + $3/ + ($4 + 18)/
Solve for R either with a calculator or through trial and error. The calculator is
approximately 4.4 percent.
The reason the realized holding period return is so much larger than the compound rate of
return is that the realized return does not account for the time value of money.
Topic
:
Measuring Single Asset Return (Equation 5.1)
Question
Status:
Previous Edition
35

Learning Goal
3:
Discuss the measurement of return and standard deviation for a portfolio
and the concept of correlation.
1)
An efficient portfolio is a portfolio that maximizes return for a given level of risk or
minimizes risk for a given level of return.
Topic
:
Portfolio Risk and Return
Question
Status:
Previous Edition
2)
New investments must be considered in light of their impact on the risk and return of the
portfolio of assets because the risk of any single proposed asset investment is not
independent of other assets.
Topic
:
Portfolio Risk and Return
Question
Status:
Previous Edition
3)
The financial manager's goal for the firm is to create a portfolio that maximizes return in
order to maximize the value of the firm.
Topic
:
Portfolio Risk and Return
Question
Status:
Previous Edition
4)
36

Two assets whose returns move in the same direction and have a correlation coefficient of
+ 1 are each very risky assets.
Topic
:
Portfolio Risk and Return
Question
Status:
Previous Edition
5)
Two assets whose returns move in the opposite directions and have a correlation coefficient
of - 1 are both either risk - free assets or low - risk assets.