1. Gunther earned a 62.5 percent return on a stock that he purchased one year ag
ID: 2729916 • Letter: 1
Question
1. Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock? A) $7.00 B) $7.50 C) $8.00 D) $8.50 2. George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George’s holding period return? A) 16.00% B) 14.00% C) 11.00% D) 19.00% 3. Use the following table to calculate the expected return from an asset. Return Probability 0.05 0.1 0.1 0.15 0.15 0.5 0.25 0.25 A) 12.50% B) 13.75% C) 15.75% D) 16.75% 4. The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? Round intermediate computations and final answer to 6 decimal places. Return Probability 0.10 0.25 0.20 0.50 0.25 0.25 A) 0.002969 B) 0.000613 C) 0.015195 D) 0.054486 1 5. You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio? A) 6.2% B) 12.4% C) 13.0% D) 13.6% 6. Which of the following investors should be willing to pay the highest price for an asset? A) An investor with a single-asset portfolio. B) An investor with a diversified portfolio. C) An investor who is not completely diversified. D) An investor who is so risk-averse that he does not recognize the benefits of diversification. 7. Which of the following is the best measure of the systematic risk in a portfolio? A) Variance B) Standard deviation C) Covariance D) Beta 8. The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on Ricci Co.? A) 28.80% B) 37.80% C) 48.60% D) 57.60% 9. The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market? A) 2.5% B) 5.0% C) 7.5% D) 10.0% 10. Given the historical information in the chapter, which of the following investment classes had the greatest average return? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks 11. Given the historical information in the chapter, which of the following investment classes had the greatest variability in returns? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks
Explanation / Answer
Requirement 1:
Calculation of Originally paid value of stock:
Given data,
Return = 62.5%
Value of stock after 1 year = $12
Dividend = $1
Let Purchase value of Stock be x
Return = [Dividend + (Value of stock after 1 year – Purchase Value)]/Purchase Value * 100
This implies,
[($1 + ($12-x)) / x] * 100 = 62.5
($1 + $12 – x) / x = 0.625
$13 –x = 0.625x
1.625x = $13
x = 8
Original Payment for the Stock = $8
Correct Option is C) $8
Requirement 2:
Calculation of Holding Period Return:
Given data,
Purchase Value of common stock = $47.5
Dividend = $1.1
Sale Value of Stock = $54
Holding Period Return = [Dividend + (Value of stock after 1 year – Purchase Value)]/Purchase Value * 100
= [(1.1 + (54-47.5))/47.5] * 100
= (7.6/47.5) * 100
= 16
Holding Period Return = 16%
Correct Option is A) 16%
Requirement 3:
Calculation of Expected Return from an asset:
Return
Probability
Return * Probability
0.05
0.1
0.005
0.1
0.15
0.015
0.15
0.5
0.075
0.25
0.25
0.0625
0.1575
Expected Return = 0.1575 = 15.75%
Correct Option is C) 15.75%
Requirement 4:
Calculation of Standard Deviation for the asset’s returns:
Expected Return = 18.75% = 0.1875
Return (x)
Probability (P)
(x – return)2
P(x - return)2
0.1
0.25
0.00765625
0.0019140625
0.2
0.50
0.00015625
0.000078125
0.25
0.25
0.00390625
0.0009765625
0.00296875
Standard Deviation
= [P(x-return)2]1/2
= (0.00296875)1/2
= 0.054486
Correct Option is D) 0.054486
Return
Probability
Return * Probability
0.05
0.1
0.005
0.1
0.15
0.015
0.15
0.5
0.075
0.25
0.25
0.0625
0.1575
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