(Related to Checkpoint 7.2) (Calculating the geometric and arithmetic average rate of return) Marsh Inc. had the following end-of-year stock prices over the last five years and paid no cash dividends: Time Marsh $11 2 12 3 16 4 6 5 11 (Click on the icon In order to copy its contents into a spreadsheet) a. Calculate the annual rate of return for each year from the above information b. What is the arithmetic average rate of return earned by investing in Marsh's stock over this period? . a. The annual rate of return at the end of year 25 % (Round to two decimal places.) The annual rate of retum at the end of year 3 is % (Round to two decimal places.) The annual rate of retum at the end of year 4 is % (Round to two decimal places.) The annual rate of retum at the end of year 5 is % (Round to two decimal places.) b. The arithmetic average rate of retum earned by investing in Marsh's stock over this period is % (Round to two decimal places) c. The geometric average rate of return earned by investing in Marsh's stock over this period is 1% (Round to two decimal places.) d. Considering the beginning and ending stock prices for the five-year period are the same, the average rate of return better describes the average annual rate of retur earned over the period. (Select from the drop-down menu.) (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.35 10% 0.10 - 4% 0.30 17% 0.40 8% 0.35 21% 0.40 16% 0.10 23% (Click on the icon in order to copy its contents into a spreadsheet.) IM a. Given the information in the table, the expected rate of return for stock Ais % (Round to two decimal places.) The standard deviation of stock Als % (Round to two decimal places.) b. The expected rate of return for stock Bis [%. (Round to two decimal places.) The standard deviation for stock Bis % (Round to two decimal places.) c. Based on the risk (as measured by the standard deviation) and return of each stock, which investment is better? (Select the best choice below) O A Stock Ais better because it has a higher expected rate of return with less risk. OB, Stock B is better because it has a lower expected rate of return with more risk (Calculating the geometric and arithmetic average rate of return) The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends: Brangus cattle Comapny $13 12 Time 1 3 4 5 10 24 29 (Click on the icon In order to copy its contents into a spreadsheet) a. Calculate the annual rate of return for each year from the above information b. What is the arithmetic average rate of return earned by investing in Brangus Cattle Company's stock over this period? a. The annual rate of return at the end of year 2 is %. (Round to two decimal places.) The annual rate of return at the end of year 3 is % (Round to two decimal places.) The annual rate of retum at the end of year 4 is %. (Round to two decimal places.) The annual rate of retum at the end of year 5 is %. (Round to two decimal places.) b. The arithmetic average rate of return eamed by investing in Brangus Cattle Company's stock over this period is %. (Round to two decimal places.) c. The geometric average rate of return earned by investing in Brangus Cattle Company's stock over this period is 1% (Round to two decimal places.) d. Which type of average rate of return best describes the average annual rate of retum eamed over the period (the arithmetic or geometric)? Why? (Select the best choice below.) O A. Geometric average return best describes the average annual rate of return over a period because it is a simple average, so it answers the question concerning the expected rate of return over a multi-year period. OB. Arithmetic average return bost describes the average annual rate of return over a period because it takes compounding into account, so it answers the question concerning the expected rate of return over a multi-year period OC Geometric average return best describes the average annual rate of return over a period because it takes compounding into account, so it answers the question concerning the expected rate of return over a multi-year period OD. Arithmetic average return bout describes the average annual rate of return over a period because it is a simple average, so it answer the question concerning the expected rate of return over a multi-year period. (Solving a comprehensive problemUse the end-of-year stock price data in the popup window to answer the following questions for the Harris and Pinwheel companies a Computo the annual rates of return for each time period and for both Soms Calculate both the arithmetic and the geometric mean rates of retum for the entire three-year period using your annual rates of rotum from part a. (Note: you may assume that the firm pays any dividende) Compute a three-year rate of return spanning the entire periode.ing the ending price for period 1 and ending price for period 4) d. Since the rate of return calculated in parte is a free-year rate of return convert a 10 annual rate of return by using the following equation Annual Rate Role of Retum of Retum . How is the ul rate of return calculated in part delated to the onometric rate of setem? When you are evaluating the cartomance of an investment that hon J-C a Enter the annual rate of return for each year for Hart in the table below. Round to two decimal places) Time Value of Annus Rate Value of Annual Rate Harris Stock of Return Pinwheel Stock of Return 1 $18 2 6 33 14 31 15 27 Enter the annual rate of retum for each year for Pinwheel in the table below. Round in two decimal places Time Value of Annual Rate Value of Annual Rate Harris Stock of Return Pinwheel Stock of Return 1 $9 $18 2 6 -33.33% 33 14 933 33% 31 4 15 7.14% 27 b. The arithmetic average rate of return earned by investing in Harris stock over this period Round to two decimal places The anthmetic average rate of return corned by investing in Pinshoe stock over this period is. Round to wo decimal places) The gecmeie average rate of rotum eamed by vesting in Haris stock over dit period is Round to two decimal placer) The geometrio average ratio of retum aated by investing in Puheel stock over this period u % (Round to two decimal places c. The three-year rate of retum sparring the entire perod for Hamisa Pound to two decimal places) The three-year rate of ratum spanning the entire period for Pintesi Round 0 two decimal places) 4. The sonul este of return converted from the tree-year rate in parte for Haeis a ) Round 1 two decimal places.) The annual rate of return converted from the three year rate in partc for Prsteel is. (Round to two decimal places) .. How is me anual rate of retum calculated in part droited to the geometric rate of retum Select the best choice below) O A The annual rate of totum calculated in parte is nothing but the geometric verage rate of retum calculated in a different way OB. The annual rate of retum calculated in partid is not related to the geometric average rate of retum OC. The annual rate of retum calculated in part is the same as the geometric rate of tetun in this problem but this is only a coincidence OD The annual rate of retum calculated in part d is nothing but the arthmec average rate of the calculated in a different way When you are entustro the performance of an investment that has been hold for several years, what type of average rate of return thmetic or geometric) shoult you use? Why? (Select the best choice below) O A The geometric rate of return should be used. It beder describes the average rual rate of retum over a period because compounds at the same se while the arithmetic rate of return is best used for a single period 8. Arttatic average return beter describes the average annual rate of retum over a period because is a simple average, soit answer the question concering the expected rate of retomover a period OC Geometric average retum better describes the average annual rate of tetum over a period because it is a simple average so it answer the question concoming the expected rate of retum over a period OD. The aritmetic rate of return should be used beter describes the average annual rate of retur over a period because a compounds at the same as while the geometric rate of return is best used for a single period (Related to Checkpoint 6.4) (Present value of a perpetuity) What is the present value of a $230 perpetuity discounted back to the present at 15 percent? GE The present value of the perpetuity is $(Round to the nearest cent.)