5. During the past five years, you owned two stocks
that had the following annual rates of return:

a. Compute the arithmetic mean annual rate of return for
each stock. Which stock is most desirable by this measure?

b. Compute the standard deviation of the annual rate of
return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure,
which is the preferable stock?

c. Compute the coefficient of variation for each stock.
(Use the Chapter 1 Appendix if necessary.) By this relative measure of risk,
which stock is preferable?

d. Compute the geometric mean rate of return for each
stock. Discuss the difference between the arithmetic mean return and the
geometric mean return for each stock. Discuss the differences in the mean
returns relative to the standard deviation of the return for each stock.

7. A stockbroker calls you and suggests that you invest
in the Lauren Computer Company. After analyzing the firm’s annual report and
other material, you believe that the distribution of expected rates of return
is as follows:

Compute the expected return [E(Ri)]
on Lauren Computer stock.

9. During the past year, you had a portfolio that
contained U.S. government T-bills, long-term government bonds, and common
stocks. The rates of return on each of them were as follows:

U.S.
government T-bills                      5.50%

U.S.
government long-term bonds     7.50

U.S. common
stocks                            11.60

During the
year, the consumer price index, which measures the rate of inflation, went from
160 to 172 (1982 – 1984 = 100). Compute the rate of inflation during this year.
Compute the real rates of return on each of the investments in your portfolio based
on the inflation rate.

12. Assume that the consensus required rate of return on
common stocks is 14 percent. In addition, you read in Fortune that the expected rate
of inflation is 5 percent and the estimated long-term real growth rate of the
economy is 3 percent. What interest rate would you expect on U.S.
government T-bills? What is the approximate risk premium for common stocks
implied by these data?

FIN550
CH2  Problems 4(A-B), 5(A-B), 6

4.   a. Someone
in the 36 percent tax bracket can earn 9 percent annually on her investments in
a tax-exempt IRA account. What will be the value of a one-time $10,000
investment in 5 years? 10 years? 20 years?

b.  Suppose the preceding 9 percent return is taxable rather than
tax-deferred and the taxes are paid annually. What will be the after-tax value
of her $10,000 investment after 5, 10, and 20 years?

5. a. Someone in the 15 percent tax bracket can earn 10 percent on his
investments in a tax-exempt IRA account. What will be the value of a $10,000
investment in 5 years? 10 years? 20 years?

      b. Suppose the preceding 10 percent return is
taxable rather than tax-deferred. What will be the after-tax value of his
$10,000 investment after 5, 10, and 20 years?

6.  Assume that the rate of inflation during all these periods
was 3 percent a year. Compute the real value of the two tax-deferred portfolios
in problems 4a and 5a.

 

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