Chapter 12

Problems 1-24
Input boxes in tan
Output boxes in yellow
Given data in blue
Calculations in red
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Chapter 12
Question 1
Input area:

Initial price
Dividend paid
Ending share price

\$
\$
\$

91
2.40
102

Output area:

Total return

14.73%

Chapter 12
Question 2
Input area:

Initial price
Dividend paid
Ending share price

\$
\$
\$

91
2.40
102

Output area:

Dividend yield
Capital gains yield

2.64%
12.09%

Chapter 12
Question 3
Input area:

Initial price
Dividend paid
Ending share price

\$
\$

91
2.40
83

Output area:

Total return
Dividend yield
Capital gains yield

-6.15%
2.64%
-8.79%

Chapter 12
Question 4
Input area:

Initial price
Coupon paid
Ending price
Inflation rate

\$ 1,040
\$
70
\$ 1,070
4%

Output area:

a. Dollar return

\$ 100.00

b. Nominal return

9.62%

c. Real return

5.40%

Chapter 12
Question 5
Input area:

Nominal return
Inflation rate

12.30%
3.10%

Output area:

a. Nominal return
b. Real return

12.30%
8.92%

Chapter 12
Question 6
Input area:

Long-term government
Long-term corporate
Inflation rate

5.80%
6.20%
3.10%

Output area:

Real long-term government return

2.62%

Real long-tern corporate return

3.01%

Chapter 12
Question 7
Input area:

Year
1
2
3
4
5

X
8%
21%
17%
-16%
9%

X
1
2
3
4
5
Total
Average return

Actual
Return
0.08
0.21
0.17
(0.16)
0.09
0.39
7.80%

Y
16%
38%
14%
-21%
26%

Output area:

Variance
Standard Deviation

X
1
2
3
4
5
Total
Average return

Average
Return
0.08
0.08
0.08
0.08
0.08

Deviation
0.00
0.13
0.09
(0.24)
0.01

Average
Return
0.15
0.15
0.15
0.15
0.15

Deviation
0.01
0.23
(0.01)
(0.36)
0.11

0.020670
14.38%

Actual
Return
0.16
0.38
0.14
(0.21)
0.26
0.73
14.60%

Variance
Standard Deviation

0.048680
22.06%

Squared
Deviation
0.00000
0.01742
0.00846
0.05664
0.00014
0.08268

Squared
Deviation
0.00020
0.05476
0.00004
0.12674
0.01300
0.19472

Chapter 12
Question 8
Input area:

Year
1970
1971
1972
1973
1974
1975

Large
Stocks
3.94%
14.30%
18.99%
-14.69%
-26.47%
37.23%

T-bills
6.50%
4.36%
4.23%
7.29%
7.99%
5.87%

Output area:

Large company stocks
Year
1970
1971
1972
1973
1974
1975
Total
Average return
Variance =
Standard deviation =

Actual
Return
0.0394
0.1430
0.1899
(0.1469)
(0.2647)
0.3723
0.3330
5.55%

Average
Return
0.0555
0.0555
0.0555
0.0555
0.0555
0.0555

Deviation
(0.0161)
0.0875
0.1344
(0.2024)
(0.3202)
0.3168

Squared
Deviation
0.00026
0.00766
0.01806
0.04097
0.10253
0.10036
0.26983

Average
Return
0.0604
0.0604
0.0604
0.0604
0.0604
0.0604

Deviation
0.0046
(0.0168)
(0.0181)
0.0125
0.0195
(0.0017)

Squared
Deviation
0.00002
0.00028
0.00033
0.00016
0.00038
0.00000
0.00117

0.053967
23.23%

T-bill returns
Year
1970
1971
1972
1973
1974
1975
Total
Average return
Variance =
Standard deviation =

Actual
Return
0.0650
0.0436
0.0423
0.0729
0.0799
0.0587
0.3624
6.04%
0.000234
1.53%

Year
1970
1971
1972
1973
1974
1975
Total
Average return
Variance =
Standard deviation =

Actual
(0.0256)
0.0994
0.1476
(0.2198)
(0.3446)
0.3136
(0.0294)
-0.49%

Average
(0.0049)
(0.0049)
(0.0049)
(0.0049)
(0.0049)
(0.0049)

Deviation
(0.0207)
0.1043
0.1525
(0.2149)
(0.3397)
0.3185

Squared
Deviation
0.00043
0.01088
0.02326
0.04618
0.11540
0.10144
0.29758

0.059517
24.40%

d. Before the fact, for most assets the risk premium will be positive; investors
money in the risky asset. After the fact, the observed risk premium can be
negative if the asset's nominal return is unexpectedly low, the risk-free rate is
unexpectedly high, or if some combination of these two events occurs.

Chapter 12
Question 9
Input area:

Year
1
2
3
4
5

Returns
7%
-12%
11%
38%
14%

X
1
2
3
4
5
Total
Average return

Actual
Return
0.07
(0.12)
0.11
0.38
0.14
0.58
11.60%

Output area:

Variance =
Standard Deviation =

0.032030
17.90%

Average
Return
0.12
0.12
0.12
0.12
0.12

Deviation
(0.05)
(0.24)
(0.01)
0.26
0.02

Squared
Deviation
0.00212
0.05570
0.00004
0.06970
0.00058
0.12812

Chapter 12
Question 10
Input area:

Stock return
Average inflation
Average T-bill rate

11.60%
3.50%
4.20%

Output area:

a. Average real return

7.83%

7.40%

Chapter 12
Question 11
Input area:

Stock return
Average inflation
Average T-bill rate

11.60%
3.50%
4.20%

Output area:

Average risk-free real return

0.68%

7.15%

Chapter 12
Question 12

T-bill rate were the highest in the early eighties. This was a
period of high inflation and is consistent with the Fisher effect.

Chapter 12
Question 13
Input area:

Purchase price
Coupon rate
Current YTM
Maturity (years)
Settlement
Maturity
Inflation rate

\$

1,030.00
8.00%
7.00%
6
01/01/08
01/01/14
4.20%

\$

1,047.67
9.48%

Output area:

Current price
Nominal return
Real return

5.07%

Chapter 12
Question 14
Input area:

Year
1
2
3
4
Average return

Returns
7%
-12%
18%
19%
10.50%

Output area:

Sum of all returns
Sum of known returns

52.50%
32.00%

Missing return

20.50%

X
1
2
3
4
5
Total
Average return
Variance =
Standard Deviation =

Actual
Return
0.070
(0.120)
0.180
0.190
0.205
0.525
0.1050
0.018675
13.67%

Average
Return
0.11
0.11
0.11
0.11
0.11

Deviation
(0.035)
(0.225)
0.075
0.085
0.100

Squared
Deviation
0.00123
0.05063
0.00563
0.00723
0.01000
0.07470

Chapter 12
Question 15
Input Area:

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6

3%
38%
21%
-15%
29%
-13%

Output Area:

Arithmetic return

10.50%

Geometric return

8.60%

Chapter 12
Question 16
Input area:

Year
1
2
3
4
5
6

\$
\$
\$
\$
\$
\$

Price
60.18
73.66
94.18
89.35
78.49
95.05

\$
\$
\$
\$
\$
\$

Dividend
0.60
0.64
0.72
0.80
1.20

Output area:

Year
1 to 2
2 to 3
3 to 4
4 to 5
5 to 6

Capital Gains
Yield
22.40%
27.86%
-5.13%
-12.15%
21.10%

Arithmetic return

11.83%

Geometric return

10.58%

Dividend
Yield
1.00%
0.87%
0.76%
0.90%
1.53%

Total
Return
23.40%
28.73%
-4.36%
-11.26%
22.63%

Chapter 12
Question 17
Input area:

Long-term corporate bonds
Average return
Standard deviation
Return less than

6.20%
8.40%
-2.20%

Output area:

Probability less than
Range
95 percent
99 percent

-2.20% =
Lower return
-10.60%
-19.00%

15.87%
Upper return
23.00%
31.40%

Chapter 12
Question 18
Input area:

Small company stocks
Average return
Standard deviation

17.10%
32.60%

Output area:

Probablity of doubling

=

0.550%

Probablity of tripling

=

0.00000100913%

Chapter 12
Question 19

It is impossible to lose more than 100% of your investment.
Therefore, return distributions are truncated at the lower tail
at -100 percent.

Chapter 12
Question 20
Input Area:

Arithmetic return
Years of historical estimation
Geometric return
Years for future estimation

15.30%
40
11.90%
20

Output Area:

Future annual return

13.64%

Chapter 12
Question 21
Input Area:

Arithmetic return
Years of historical estimation
Geometric return
Years for future estimation

12.30%
82
10.40%
30

Output Area:

Future annual return

11.62%

Chapter 12
Question 22
Input area:

Year
1973
1974
1975
1976
1977
1978
1979
1980

Output area:

T-bills
7.29%
7.99%
5.87%
5.07%
5.45%
7.64%
10.56%
12.10%

Inflation
8.71%
12.34%
6.94%
4.86%
6.70%
9.02%
13.29%
12.52%

T-bills
Year
1990
1991
1992
1993
1994
1995
1996
1997
Total
Average return

Actual
Return
0.0729
0.0799
0.0587
0.0507
0.0545
0.0764
0.1056
0.1210
0.6197
0.0775

Variance =

0.000616

Standard deviation =

Average
Return
0.0775
0.0775
0.0775
0.0775
0.0775
0.0775
0.0775
0.0775

Deviation
(0.0046)
0.0024
(0.0188)
(0.0268)
(0.0230)
(0.0011)
0.0281
0.0435

Squared
Deviation
0.00002
0.00001
0.00035
0.00072
0.00053
0.00000
0.00079
0.00190
0.00431

Average
Return
0.0930
0.0930
0.0930
0.0930
0.0930
0.0930
0.0930
0.0930

Deviation
(0.0059)
0.0304
(0.0236)
(0.0444)
(0.0260)
(0.0028)
0.0399
0.0322

Squared
Deviation
0.00003
0.00093
0.00056
0.00197
0.00067
0.00001
0.00159
0.00104
0.00680

Average
Return
(0.0140)
(0.0140)
(0.0140)
(0.0140)
(0.0140)
(0.0140)
(0.0140)
(0.0140)

Deviation
0.0009
(0.0247)
0.0040
0.0160
0.0023
0.0013
(0.0101)
0.0103

Squared
Deviation
0.00000
0.00061
0.00002
0.00026
0.00001
0.00000
0.00010
0.00011
0.00110

2.48%

Inflation
Year
1990
1991
1992
1993
1994
1995
1996
1997
Total
Average return

Actual
Return
0.0871
0.1234
0.0694
0.0486
0.0670
0.0902
0.1329
0.1252
0.7438
0.0930

Variance =

0.000971

Standard deviation =

3.12%

Average observed real return
Actual
Year
Return
1990
(0.0131)
1991
(0.0387)
1992
(0.0100)
1993
0.0020
1994
(0.0117)
1995
(0.0127)
1996
(0.0241)
1997
(0.0037)
Total
(0.1120)
Average return
(0.0140)
Variance =
Standard deviation =

0.000157
1.25%

d. The statement that T-bills have no risk refers to the fact that there is only an
extremely small chance of the government defaulting, so there is little default
risk. Since T-bills are short-term, there is also very limited interest rate risk.
However, as this example shows, there is inflation risk, i.e. the purchasing
power of the investment can actually decline over time even if the investor
is earning a positive return.

Chapter 12
Question 23
Input area:

Average return
Standard deviation
Return less than

12.30%
20.00%
0.00%

Output area:

Probability less than

0.00% =

26.93%

Chapter 12
Question 24
Input area:

Long-term corporate bonds
Average return
Standard deviation
T-bills
Average return
Standard deviation
a. Return greater than
Return less than
b. Return greater than
Return less than
c. Return less than
Return greater than

6.20%
8.40%
3.80%
3.10%
10.00%
0.00%
10.00%
0.00%
-4.18%
10.56%

Output area:

a. Probablity of return >
Probabilty of return <

10.00%
0.00%

=
=

32.55%
23.02%

b. Probablity of return >
Probabilty of return <

10.00%
0.00%

=
=

2.28%
11.01%

c. Probablity of return <
Probabilty of return >

-4.18%
10.56%

=
=

10.83%
1.46%