1. An investor bought a share of stock a year ago at a price of $37 a share. Today the stock is selling for $40 a share. The investor was paid a dividend of $1 a share during the past year. What was her actual realized holding period rate of return on the stock for the year?

2. The current price of the stock is given in #1 above. The stock is expected to reach a price of $45 a year from now. The company is expected to pay the same dividend next year as it did this year. If all of that comes true, what is the expected holding period rate of return on the stock for next year?

3. An investor bought a share of Google stock for $1,031. She held the stock for 6 months and then sold it at a price of $1,070. Google did not pay and dividends during that time. Compute the investors holding period rate of return.

4. Some investors are risk takers and will make a risky investment in the hope of making a large rate of return. Other investors are sufficiently risk averse so that they would prefer safer investments, despite the potentially smaller rates of return. Information about historical rates of return and standard deviation for 3 stocks are set out below. Nothing significant is expected to change regarding the performance of any of the 3 companies. Think carefully about this one.
   1. Which stock would be preferable to an investor with a strong appetite for risk (i.e. a high risk tolerance)? Why?
   2. Which stock would be preferable to a conservative investor seeking to avoid risk? Why?
   3. In which stock would an investment not make sense to a rational investor, whatever their risk tolerance? Why?

Historical Mean Returns Historical Standard Deviation

Stock of Company A 25% 30%

Stock of Company B 10% 30%

Stock of Company C 10% 5%