Current Stock 5 Year Stock Rate Dividend Yield Beta Treasury Verizon $54.00 48.3

Question

Current Stock

5 Year Stock Rate

Dividend Yield

Beta

Treasury

Verizon

$54.00

48.36

2.41

0.77

2.15%

Apple, INC

$221.30

72.56

2.92

1.26

2.15%

Fiat

$16.56

5.05

0

2.03

2.15%

UHC

$268.28

74.45

3.6

0.73

2.15%

Calculate the average annual capital gain or loss (stock price change) over the last five years. Calculate the percentage change from five years ago, and divide by five. For example, if the stock price increased from 50 to 100 in five years, the percentage increase would be 100% and the average annual gain would be 20% (100 divided by 5). Which of these companies has the highest or lowest capital gain?

Now estimate the average total return, which is the capital gain plus dividends. If the dividend yield is 2%, then the average total return would be 22% in the example above. Which of these four companies has the highest or lowest total return? Does the order change?

Finally, calculate the Treynor Ratio. First, take the total return for each of your four companies and subtract the three-month treasury bill rate (the “risk-free rate”). Then divide this by the beta of each company. This ratio is a measure of the risk-adjusted return of each stock. The higher the return, the higher the Treynor Ratio. But the higher the beta (which is a measure of risk), the lower the Treynor Ratio. Which of your companies has the highest or lowest risk-adjusted return? Does the order change from what you found in 1) and 2) above?

Current Stock

5 Year Stock Rate

Dividend Yield

Beta

Treasury

Verizon

$54.00

48.36

2.41

0.77

2.15%

Apple, INC

$221.30

72.56

2.92

1.26

2.15%

Fiat

$16.56

5.05

0

2.03

2.15%

UHC

$268.28

74.45

3.6

0.73

2.15%

Explanation / Answer

Answer a:

Highest Capital Gain = UHC

Lowest Capital gain = FIAT

Answer 2:

Highest Average total return = UHC

Lowest Average Total return = FIAT

Answer c.

The highest risk adjusted return = UHC

The lowest risk adjusted return = FIAT

The order has not changed from the above 1 & 2

stocks 5 years stock return Average Annual Gain Verizon 48.36 =48.36/5 = 9.67 APPLE 72.56 =72.56/5 = 14.51 FIAT 5.05 =5.05/5 = 1.01 UHC 74.45 = 74.45/5 = 14.89

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