10. The Long Run (LO4, CFA2) Given your answering the han said and the discussion in the chapter, why would any rational person do anything other than load up on 100 percent smu stocks? Questions and Problems Core Questions 1. Calculating Returns (LOI, CFAI) Suppose you bought 100 shares of stock at an initial price of $37 per share. The stock paid ar dividend of $.28 per share during the following year, and the share price at the end of the year was $41. Compute your total dollar return on this investment Does your answer change if you keep the stock instead of selling it? Why or why nor 2. Calculating Yields (LOI, CFAT) In Problem I, what is the capital gains yield? The dividend yield? What is the total rate of return on the investment? 3. Calculating Returns (Lou CFAT) Rework Problems 1 and 2 assuming that you buy 500 shares of the stock and the ending share price is $34. 4. Historical Returns (L03) What is the historical rate of return on each of the following inte ments? What is the historical risk premium on these investments? a. Long-term government bonds b. Treasury bills e. Large stocks d. Small stocks 5. Calculating Average Returns (LOT. CFAD) The rates of return on Cherry alopes, Inc., Stock over the last five years were 17 percent, 11 percent. -2 percent, 3 percent, 3. 14 percent Over the same period, the returns on Struw Construction Company's sterk were 16 percent , 18 percent . -6 percent, I percent, and 22 percent. What was the arithmetic everage return on each stock over this period? 6. Calculating Variability (LO4, CFA2) Using the information from Problem 5. calculate the vari ances and the standard deviations for Cherry and Straw. 7. Return Calculations (LOI, CFAI) A particular stock has a dividend yield of 1.2 percent. Las year, the stock price fell from $65 to $59. What was the return for the year? 8. Geometric Returns (LO1, CFA) Using the information from Problem 5. what is the geometric return for Cherry Jalopies, Inc.? 9. Arithmetic and Geometrie Returns (L01, CFA) A stock has had returns of 21 percent, 12 percent. 7 percent. -13 percent. -4 percent, and 26 percent over the last six years. What are the arithmetic and geometric returns for the stock? 10. Returns and the Bell Curve (L04, CFA3) An investment has an expected return of Il percent per year with a standard deviation of 24 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to earn between -13 percent and 35 percent? How often do you expect to earn less than-13 percent? II. Returns and the Bell Curve (LO4, CFA3) An investment has an expected return of 12 percent per year with a standard deviation of 6 percent. Assuming that the returns on this investment at at least roughly normally distributed, how frequently do you expect to lose money? 12. Using Returns Distributions (L04, CFA2) Based on the historical record, if you invest in long-term U.S. Treasury bonds, what is the approximate probability that your return will be below -3.9 percent in a given year? What range of returns would you expect the time? 99 percent of the time? see 95 percent of 13. Using Returns Distributions (LO2, CFA2) Based on the historical record, what is the appront mate probability that an investment in small stocks will double in value in a single year? How about triple in a single year? 14. Risk Premiums (LO2) Refer to Table 1.1 for large-company stock and T-bill returns for the period 1973-1977: Intermediate Questions a. Calculate the observed risk premium in each year for the common stocks. b. Calculate the average returns and the average risk premium over this period. d. Is it possible that the observed risk premium can be negative? Explain how this can happen c. Calculate the standard deviation of returns and the standard deviation of the risk premium and what it means. 36 Part1 - Introduction
