1. The stock of FM423.com is trading at $25 today. Exactly one year ago, the stock was trading at $32.50. (a) Compute the realized return on holding FM423.com over 1 year. Assume that the stock has not been paying any dividends. (b) Assume instead that the stock paid quarterly dividends of $1.25, $2.45, $0.25, $0.25. The first dividend payment was made exactly 9 months ago and the last dividend payment was today. Compute the stock's realized return assuming that dividends were reinvested in the stock when its (ex-dividend) price was $30.15, $26.25, $24 and $25 (price today), respectively, (c) The economy is sliding into a recession, and FM423.com announced that it would suspend its dividend payments for at least one year. Analysts have computed the price of FM423.com's stock one year from now under three possible scenarios: State Price of FM423.com Probability Recession $15 0.4 Unchanged $29 0.4 Boom $35 0.2 Compute the expected return on holding the stock of FM423.com for one year. 2. A file named returns95-99 has been placed on Moodle, together with this problem set. The file can be opened in Excel. It contains end-of-month returns from January, 1995, to December, 1999, for seven companies: Coca Cola, Disney, AT&T, Kellogg, General Electric, IBM, and Microsoft. It also contains end-of-month returns for the S&P500 index and for the T-bill whose maturity is closest to one month. We will assume that the S&P500 represents the market portfolio and that the T-bill represents the riskless asset. Note that the returns are monthly and not yearly returns. Monthly data gives us better estimates of variance and covariance than yearly data. Calculate the sample mean and sample standard deviation of the historical monthly returns for Coca Cola, Disney, and AT&T. You may find the Excel spreadsheet func- tions average and stdev useful for this. Also calculate the sample correlation matrix for the monthly returns of the three companies. You may find the Excel spreadsheet function correl useful for this. Express the sample means, standard deviations, and correlations accurate to 5 decimal places (i.e., each number should be correct when expressed as 0.xxxxx when the usual rounding rules are used). 1. The stock of FM423.com is trading at $25 today. Exactly one year ago, the stock was trading at $32.50. (a) Compute the realized return on holding FM423.com over 1 year. Assume that the stock has not been paying any dividends. (b) Assume instead that the stock paid quarterly dividends of $1.25, $2.45, $0.25, $0.25. The first dividend payment was made exactly 9 months ago and the last dividend payment was today. Compute the stock's realized return assuming that dividends were reinvested in the stock when its (ex-dividend) price was $30.15, $26.25, $24 and $25 (price today), respectively, (c) The economy is sliding into a recession, and FM423.com announced that it would suspend its dividend payments for at least one year. Analysts have computed the price of FM423.com's stock one year from now under three possible scenarios: State Price of FM423.com Probability Recession $15 0.4 Unchanged $29 0.4 Boom $35 0.2 Compute the expected return on holding the stock of FM423.com for one year. 2. A file named returns95-99 has been placed on Moodle, together with this problem set. The file can be opened in Excel. It contains end-of-month returns from January, 1995, to December, 1999, for seven companies: Coca Cola, Disney, AT&T, Kellogg, General Electric, IBM, and Microsoft. It also contains end-of-month returns for the S&P500 index and for the T-bill whose maturity is closest to one month. We will assume that the S&P500 represents the market portfolio and that the T-bill represents the riskless asset. Note that the returns are monthly and not yearly returns. Monthly data gives us better estimates of variance and covariance than yearly data. Calculate the sample mean and sample standard deviation of the historical monthly returns for Coca Cola, Disney, and AT&T. You may find the Excel spreadsheet func- tions average and stdev useful for this. Also calculate the sample correlation matrix for the monthly returns of the three companies. You may find the Excel spreadsheet function correl useful for this. Express the sample means, standard deviations, and correlations accurate to 5 decimal places (i.e., each number should be correct when expressed as 0.xxxxx when the usual rounding rules are used)
