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81.
Over the past fifteen years, the common stock of The Flower Shoppe, Inc.
has produced an arithmetic average return of 12.2 percent and a geometric
average return of 11.5 percent. What is the projected return on this stock
for the next five years according to Blume's formula?
82.
Based on past 23 years, Westerfield Industrial Supply's common stock has
yielded an arithmetic average rate of return of 10.5 percent. The geometric
average return for the same period was 8.57 percent. What is the estimated
return on this stock for the next 4 years according to Blume's formula?
83.
A stock has a geometric average return of 14.6 percent and an arithmetic
average return of 15.5 percent based on the last 33 years. What is the
estimated average rate of return for the next 6 years based on Blume's
formula?
84.
Suppose a stock had an initial price of $80 per share, paid a dividend of
$1.35 per share during the year, and had an ending share price of $87. What
was the capital gains yield?
85.
Suppose you bought a 10 percent coupon bond one year ago for $950. The
face value of the bond is $1,000. The bond sells for $985 today. If the
inflation rate last year was 9 percent, what was your total real rate of return
on this investment?
86.
Calculate the standard deviation of the following rates of return:
87.
You've observed the following returns on Crash-n-Burn Computer's stock
over the past five years: 2 percent, -12 percent, 16 percent, 22 percent, and
18 percent. What is the variance of these returns?
88.
You've observed the following returns on Crash-n-Burn Computer's stock
over the past five years: 3 percent, -10 percent, 24 percent, 22 percent, and
12 percent. Suppose the average inflation rate over this time period was 3.6
percent and the average T-bill rate was 4.8 percent. Based on this
information, what was the average nominal risk premium?
89.
You bought one of Great White Shark Repellant Co.'s 10 percent coupon
bonds one year ago for $815. These bonds pay annual payments, have a
face value of $1,000, and mature 14 years from now. Suppose you decide to
sell your bonds today when the required return on the bonds is 14 percent.
The inflation rate over the past year was 3.7 percent. What was your total
real return on this investment?
90.
You find a certain stock that had returns of 4 percent, -5 percent, -15
percent, and 16 percent for four of the last five years. The average return of
the stock for the 5-year period was 13 percent. What is the standard
deviation of the stock's returns for the five-year period?
91.
A stock had returns of 12 percent, 16 percent, 10 percent, 19 percent, 15
percent, and -6 percent over the last six years. What is the geometric
average return on the stock for this period?
92.
Assume that the returns from an asset are normally distributed. The
average annual return for the asset is 18.1 percent and the standard
deviation of the returns is 32.5 percent. What is the approximate probability
that your money will triple in value in a single year?
93.
Over a 30-year period an asset had an arithmetic return of 13 percent and a
geometric return of 10.5 percent. Using Blume's formula, what is your best
estimate of the future annual returns over the next 5 years?
Essay Questions
94.
Define and explain the three forms of market efficiency.
95.
What are the two primary lessons learned from capital market history? Use
historical information to justify that these lessons are correct.
96.
How can an investor lose money on a stock while making money on a bond
investment if there is a reward for bearing risk? Aren't stocks riskier than
bonds?
97.
Shawn earned an average return of 14.6 percent on his investments over
the past 20 years while the S&P 500, a measure of the overall market, only
returned an average of 13.9 percent. Explain how this can occur if the stock
market is efficient.
98.
You want to invest in an index fund which directly correlates to the overall
U.S. stock market. How can you determine if the market risk premium you
are expecting to earn is reasonable for the long-term?
