Solution Manual-Investment Essay

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Pages: 89

Part B

END-OF-CHAPTER

SOLUTIONS

Fundamentals of Investments, 5th edition
Jordan and Miller

Chapter 1
A Brief History of Risk and Return

Concept Questions

1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return.

2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the dividend yield must be four percent.

3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –100 percent; if returns were truly normally distributed, you could lose much more.

4. To calculate an arithmetic return, you

(The actual answer is less than once every 1 million years, so don’t hold your breath.)

|14. |Year |Common stocks |T-bill return |Risk premium |
| |1973 |–14.69% |7.29% |–21.98% |
| |1974 |–26.47% |7.99% |–34.46% |
| |1975 |37.23% |5.87% |31.36% |
| |1796 |23.93% |5.07% |18.86% |
| |1977 |–7.16% |5.45% |–12.61% |
| | |12.84% |31.67% |–18.83% |

a. Annual risk premium = Common stock return – T-bill return (see table above). b. Average returns: Common stocks = 2.57% ; T-bills = 6.33%; Risk premium = –3.77% c. Common stocks: Var = 0.072337 Standard deviation = 0.2690 = 26.90% T-bills: Var = 0.0001565 Standard deviation = 0.0125 = 1.25% Risk premium: Var = 0.077446 Standard deviation = 0.2783 = 27.83%

d. Before the fact, the risk premium