Managerial Finance - Homework 3

What are the arithmetic and geometric average returns for a stock with annual returns of 17 percent, 9 percent, -6 percent, and 14 percent? Multiple Choice 11.42%; 8.12% 8.50%; 11.42% 8.50%; 8.12% 8.12%; 8.50% 11.42%; 8.50%

(.17+.09-.06+.14)/4 = .085 [(1.17*1.09*0.94*1.14)^.25]-1 = .0812

Connor Corp. has large amount of data that they are trying to analyze from the last 15 years. They have an arithmetic sales growth average of 12% and a geometric average growth of 9%. Using Blume's formula, what would the forecast sales growth be for the next five years? Multiple Choice 8.44% 9.05% 10.54% 10.95% 11.14%

11.14 = [(5-1)/(15-1)]*0.09 + [(5-1)/(15-1)]*0.12 = .1114

You purchased a stock at a price of $45.82. The stock paid a dividend of $1.75 per share and the stock price at the end of the year is $51.67. What is the capital gains yield? Multiple Choice 12.77% 10.76% 11.32% 3.82% 16.59%

12.77%

A stock had returns of 18.55 percent, −7.75 percent, and 24.05 percent for the past three years. What is the standard deviation of the returns? Multiple Choice 13.47% 9.94% 2.89% 17.00% 28.89%

17% = Square Root of [(48.3+374.42+155)/2] (18.55-11.6)^2+(-7.75-11.6)^2+(24.05-11.6)^2/(3-1)

You purchased 280 shares of stock at a price of $53.37 per share. Over the last year, you have received total dividend income of $305. What is the dividend yield? Multiple Choice 16.0% 6.2% 5.7% 2.0% 1.1%

2%

You purchased a stock at a price of $49.47. The stock paid a dividend of $1.95 per share and the stock price at the end of the year is $55.57. What was the dividend yield? Multiple Choice 4.34% 12.33% 4.73% 3.94% 16.27%

3.94% = 1.95/49.47

Suppose a stock had an initial price of $58 per share, paid a dividend of $1.85 per share during the year, and had an ending share price of $76. Compute the percentage total return. Multiple Choice 34.22% 26.12% 43.45% 35.94% 32.51%

34.22% = [(76-58)+1.85]/58

A stock has annual returns of 5 percent, 21 percent, −12 percent, 7 percent, and 6 percent for the past five years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. Multiple Choice 5.80; 4.86 5.80; 5.03 5.62; 5.03 5.40; 5.03 5.40; 4.86

5.40; 4.86

You own a stock that had returns of 11.61 percent, −15.92 percent, 20.78 percent, and 19.37 percent over the past four years. What was the arithmetic average return for this stock? Multiple Choice 7.85% 8.96% 8.41% 9.32% 9.71%

8.96% = (.1161-.1592+20.78+19.37)/4

If the risk premium on the stock market was 6.72 percent and the risk-free rate was 2.52 percent, what is the stock market return? Multiple Choice 7.39% 6.72% 10.08% 9.24% 4.20%

9.24% = 6.72 + 2.52

Which of the following statements are true based on the historical record for 1926-2016? Multiple Choice Risk-free securities produce a positive real rate of return each year. Bonds are generally a safer, or less risky, investment than are stocks. Risk and potential reward are inversely related. The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. Returns are more predictable over the short term than they are over the long term.

Bonds are generally a safer, or less risky, investment than are stocks.

The arithmetic average tells you what you actually earned per year on average, whereas the geometric average tells you what you earned in a typical year. True or False

False

When attempting to forecast for extremely long intervals, such as 50 years, it is best to use: Multiple Choice Geometric Averages Arithmetic Averages Expected Return Averages Forecasting Averages Long Range Modeling Averages

Geometric Averages

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? Multiple Choice Risk premium Geometric average return Arithmetic average return Standard deviation Variance

Risk Premium

Which one of the following categories of securities had the highest average annual return for the period 1926-2016? Multiple Choice U.S. Treasury bills Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds

Small-company stocks

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016? Multiple Choice Long-term government bonds Small-company stocks Large-company stocks Long-term corporate bonds U.S. Treasury bills

U.S. Treasury bills

Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year X Y 1 11 % 25 % 2 29 46 3 18 -11 4 -19 -25 5 20 54 a. Calculate the arithmetic average return for X. b. Calculate the arithmetic average return for Y. c. Calculate the variance for X. d. Calculate the variance for Y. e. Calculate the standard deviation for X. f. Calculate the standard deviation for Y.

a. 11.8% = (0.11+0.29+0.18-0.19+0.20)/5 b. 17.8% = (0.25+0.46-0.11-0.25+0.54)/5 c. .03377 = 1,350.8/4 = 337.7 (11-11.8)^2+(29-11.8)^2+(18-11.8)^2+(-19-11.8)^2+(20-11.8)^2/(5-1) d. .12047 = 4,818.8/4 = 1,204.5 (25-17.8)^2+(46-17.8)^2+(-11-17.8)^2+(-25-17.8)^2+(54-17.8)^2/(5-1) e. 18.38% = Square roof of 337.7 f. 34.71% = Square root of 1,204.7