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Chapter 9

Chapter 9. Characterizing Risk and Return. Problem 1.

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Chapter 9

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  1. Chapter 9 Characterizing Risk and Return

  2. Problem 1 You held 500 shares of 3M common stock. The company’s share price was $52.81 at the beginning of the year. During the year, the company paid a dividend of $2.56 per share, and ended the year at a price of $58.12. What is the dollar return, the percentage return, the capital gains yield, and the dividend yield for your investment in 3M?

  3. Problem 1 Answers Dollar return = 500 x ($58.12-$52.81+$2.56) = $3,935 Percent return = ($58.12-$52.81+$2.56)/$52.81 = 14.90% Capital gains yield = ($ 58.12-$52.81)/$ 52.81 = 10.05% Dividend yield = $2.56/$ 52.81 = 4.85%

  4. Problem 2 Using the following returns, calculate the average return, the variance, the standard deviation, and the coefficient of variation for Jones stock. YearJones 1 7% 2 14 3 - 3

  5. Problem 2 Answers Average Return = (7 + 14 - 3) / 3 = 6.00% σ2Jones = [(7 – 6)2 + (14 – 6)2 (- 3 – 6)2] / (3 - 1) σ2Jones = 73 σJones = (73)1/2 = 8.54%

  6. CV = 8.54/6 = 1.42

  7. Problem 3 All of the following are synonyms for market risk except: Systematic risk Non-diversifiable risk Firm specific risk

  8. Problem 3 Answer Answer: C

  9. Problem 4 • At the beginning of the year you owned $3,000 of Dollenz stock, $11,000 of Torkelson stock, and $6,000 of Nesmith stock. During the year the three company's returns were -7.6 percent, 21.4 percent, and 14.8 percent respectively. What is your portfolio return?

  10. Problem 4 Answer

  11. Rp = (0.15 x -7.6%) + (.55 x 21.4%) + (.30 x 14.8%) Rp = 15.07%

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