Questions and Answers of Investments Analysis And Management

Calculate cumulative wealth for corporate bonds for the period 1926–2010, using a geometric mean of 5.9 percent (85‐year period).
As an illustration of how the arithmetic mean can be misleading in describing returns over multiple periods, consider the data in Table 6‐4, which show the movements in price for two stocks over
Given a cumulative wealth index for Treasury bills of $20.21 for the period 1926–2010, calculate the geometric mean.
Suppose your father earned a salary of $35,000 in 1975, and by 2014, his salary had increased to $135,000. How much better off is he in terms of purchasing power? We can convert the $35,000 in 1975
Given an inflation rate of 3 percent over the period 1926–2010 (geometric mean annual average), calculate the inflation‐adjusted cumulative wealth index for corporate bonds as of year‐end 2010.
The return for the S&P 500 in 2014 was about 13.5 percent. The rate of inflation was about 1.5 percent. Therefore, the real (inflation‐adjusted) return for large U.S. common stocks in 2014 was
Given a geometric mean inflation rate of 3 percent, determine how long it would take to cut the purchasing power of money in half using the rule of 72.
Consider the period 1926–2014. The geometric mean for the S&P 500 for the entire period was approximately 10 percent and for the CPI, 3.0 percent. Therefore, the real (inflation‐ adjusted)
The standard deviation of the 10 annual returns from 2005 through 2014 for the S&P 500 can be calculated as shown in Table 6‐5.Table 6‐5 TABLE 6-5 Calculating the Standard Deviation for the
If a basket of consumer goods cost $1 at the beginning of 1926 and $12.34 at the end of 2010, calculate the geometric mean rate of inflation over this period.
Assume that over the period 1926–2010 the yield index component of common stocks had a geometric mean annual average of 3.99 percent. Calculate the cumulative wealth index for this component as of
Using the data from Table 6‐6, we can assess the relative accuracy of Equation 6-9 as follows:Table 6‐6Equation 6-9 (1.096) ≈ (1.115)² -(0.199)² 1.201≈ 1.244 -0.039 1.201≈ 1.204
Using the returns for the years 1926–1931 from Table 6‐1, determine the geometric mean for this period. Show how the same result can be obtained from the ending wealth index value for 1931 of
Assume that Treasury bonds continued to have a geometric mean as shown in Table 6‐6 until 100 years have elapsed. Calculate the cumulative ending wealth per $1 invested for this 100‐year period.
The ending wealth value of $2,420.46 for common stocks in Figure 6‐2 is the result of compounding at 9.6 percent for 85 years, orCWI = WI0 (1.096)85 = $1.00 (2,420.46) = $2,420.46 Figure 6‐2
The CWI for common stocks (S&P 500) for 1926–2010 (85 years) was $2,364.78, based on a geometric mean of 9.57 percent for that period. The average dividend yield for those 85 years was 3.99
Assume that over the period 1926–2010 the geometric mean rate of return for Treasury bonds was 5.4 percent. The corresponding number for the rate of inflation was 3 percent. Calculate, two
Using data for three periods, construct a set of returns that will produce a geometric mean equal to the arithmetic mean.
Common stocks have returned slightly less than twice the compound annual rate of return for corporate bonds. Does this mean that common stocks are about twice as risky as corporates?
Someone offers you a choice between $50,000 to be received 10 years from now, or a $20,000 portfolio of stocks guaranteed to earn a compound annual average rate of return of 10.4 percent per year for
Can cumulative wealth be stated on an inflation‐ adjusted basis?
Over the long run, stocks have returned a lot more than bonds, given the compounding effect. Why, then, do investors buy bonds?
Given the strong performance of stocks over the last 85 years, do you think it is possible for stocks to show a negative average return over a 10‐year period?
Suppose someone promises to double your money in 10 years. What rate of return are they implicitly promising you?
A technical analyst claimed in the popular press to have earned 25 percent a month for 10 years using his technical analysis technique. Is this claim feasible?
Which alternative would you prefer: (1) 1 percent a month, compounded monthly, or (2) 1/2 percent a month, compounded semimonthly (24 periods)?

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