Question 4

At year beginning, you observed that the price of stock Apple was $100 and the price of Stock Orange was $900. To understand the relation between risk and return, you keep watching on the performance of the stock and the bond over the next three years. The information you observed is as follows:

	Stock Apple		Stock Orange
Year	Year-end Price ($)	Dividend ($)	Year-end Price ($)	Dividend ($)
1	115	5	915	20
2	110	1	925	20
3	145	10	930	30

1. What is the stock Apples dividend yield in year 2? What is the Stock Oranges capital gains yield in year 3? (2 marks)
2. During the 3-year observation period, what are the average annual total return of Apple and Orange? (4 marks)
3. Based on the lessons learned from the capital market history, discuss your interpretation of higher risk and higher expected return. (2 marks)