1. You purchased 1,000 shares of stock for $43 per share exactly one year ago. D
ID: 2643975 • Letter: 1
Question
1. You purchased 1,000 shares of stock for $43 per share exactly one year ago. During the year, the stock paid a $.50 dividend per share and the current stock price is $27 per share. The inflation rate the last year was 2%. Answer the following (showing all work):
(a) Calculate the actual return (also called percentage return) on your investment over the last year.
(b) Calculate (i) the dividend yield and (ii) the percentage capital gain.
(c) Calculate the real rate of return on the stock.
2. You are interested in buying a stock that has a price of $52. You have projected that next year there is: a 10% probability the stock will equal $11, a 20% probability the stock will equal $44, a 30% probability the stock will equal $57, a 30% probability the stock will equal $71, and a 10% probability the stock will equal $100. Answer the following (showing all work):
(a) what is the expected return on the stock if you buy today and sell next year?
(b) what is the expected standard deviation of the stock?
3. Find two publicly traded stocks in different industries and look up estimates of their ?.
(a) Using Rf=1%, E(Rm) = 8%, calculate the E(r) for each stock.
(b) Explain in words a non-finance student could understand why the one stock has a higher expected return than the other.
4. Find an announcement of new information made within a month from today (i.e., earnings announcement, merger, etc.) for any publicly traded stock that moves the stock price at least 1%. Print out or draw a chart that shows at least 2 days before the event and at least one day after. [Note: make sure you find the first announcement of the information.]
(a) Using this chart, analyze if the evidence is consistent with the semi-strong form market efficiency.
(b) Is the stock market reaction consistent with the strong form of market efficiency?
5. Geothermal corporation issued a press release before the stock market opened announcing that its earnings have decreased by 30% over the last year earnings. Explain how each of the following individual scenarios could be consistent with the semi-strong form of market efficiency.
(a) When trading opened after the announcement and throughout the first day, there was no stock price change after the company announced the 30% decrease in earnings.
(b) The stock price of Geothermal increased slowly over the 30 days before the announcement of the 30% decrease in earnings.
(c) The stock price decreased by 10% immediately following the announcement but then increased throughout the day so that the closing price was only 2% below the previous day.
Explanation / Answer
Question 1:
a)
Actual return = (Ending price + Dividend- Beginning price)/ Beginning price
= (27+0.50-43)/43
= -36.05%
b)
Dividend yield = Dividend / Beginning price
= 0.50/43
= 1.163%
Capital gain yield = (Ending price – Beginning price)/ Beginning price
= (27-43)/43
= -37.21%
c)
Real Rate of return = (NR-IR)/(1+IR)
=(-0.3605-0.02)/(1+0.02)
=-0.3805/1.02
= -37.30%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.