Finance

One year ago, you purchased a 6 percent coupon bond with a face value of $1,000 when it was selling for 98.6 percent of par. Today, you sold this bond for 101.2 percent of par. What is your total dollar return on this investment?

$86 Total dollar return = (1.012 ×$1,000) - (.986 ×$1,000) + (.06 ×$1,000) = $86

Calculate the geometric average return for the returns in the following table: 10.25 37.80 45.07 (8.10) (20.16)

10.09%

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?

11.14% R(5) = (5 − 1)/14 × 9% + (15 − 5)/14 × 12% R(5) = (4)/14 × .09 + (10)/14 × .12 R(5) = .0257 + .0857 R(5) = .1114 = 11.14%

Suppose a stock had an initial price of $121 per share, paid a dividend of $3.30 per share during the year, and had an ending share price of $153. What was the dividend yield?

Dividend yield = $3.30 / $121Dividend yield = .0273, or 2.73%

When attempting to forecast for extremely long intervals, such as 50 years, it is best to use:

Expected Average Returns

Suppose a stock had an initial price of $121 per share, paid a dividend of $3.30 per share during the year, and had an ending share price of $153. Compute the percentage total return.

R = [($153 - 121) + 3.30] / $121R = .2917, or 29.17%

Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

The price of each security in that market will frequently fluctuate.

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

True

The geometric average return answers the question,

What was your average compounded return per year over a particular period?

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

lower; lower

According to the video, short-run projected wealth levels calculated using geometric averages are probably ______________.

pessimistic

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

All available information

Suppose a stock had an initial price of $121 per share, paid a dividend of $3.30 per share during the year, and had an ending share price of $153. What was the capital gains yield?

Capital gains yield = ($153 - 121) / $121Capital gains yield = .2645, or 26.45%

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

risk premium

If the financial markets are efficient then:

stock prices should respond only to unexpected news and events.

One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the:

sum of the dividend yield and the capital gains yield is 3.1 percent.

The standard deviation measures the _____ of a security's returns over time.

volatility