Daniyal Ali

18u00265
Assignment
Ch 6: Risk and Return

Q1. Assume the purchase of 10% coupon Treasury bond at a price of $960 held one year and sold for $1020.
a) What is the total return (TR) of the bond?
TR= 100 + (1020-960) / 960 = 16.66%
b) What is the bond return relative?
RR=1+0.16666=1.16

Q2. 100 shares of data shield are purchased at $30 per share and sold one year later at $26 per share. A dividend of $2 per
share is paid.
a) What is the total return (TR) of the stock?
TR= 2 + (26-30/30) = -6.67%
b) What is the stock return relative?
RR+10.066=0.93

Q3. Assume the purchase of warrants of data shield at $3 per share, a holding period of six months and the sale at $3.75 per
share.
a) What is the warrant total return?
TR= 0 + (3.75-3 /3) = 25%
b) What is the Warrant return relative?
RR=1+0.25=1.25

Q4. The total returns for each year as shown in table 6-1. On a similar pattern, calculate Total returns for the S&P 500 index
for the years
a) 2009-2010 TR= [23.12+(1257.64-1115.10)]/1115.1=14.86%
b) 1999 -2000. TR=[15.69+(1320.28-1469.25)]/1469.25=-9.07%

Q5. Calculate the return relative for both periods mentioned in Q4.
A 1+0.1486=1.1486
B 1-0.907=0.9093

Q6.Calculate the cumulative wealth per $1 invested for 1990s, one of the two greatest decades in the 20 th century to own
common stocks. This will provide you with a perspective on common stock returns at their best. Using S&P total returns in
table 6-1 and converting them to return relatives, calculate the CWI for the decade of 1990s.
RR
1990 1-0.0314=0.9686
1991 1+0.3=1.3
1992 1+0.0743=1.0743
1993 1+0.0994=1.0994
1994 1+0.0129=1.0129
1995 1+0.3711=1.3711
1996 1+0.2268=1.2268
1997 1+0.331=1.331
1998 1+0.2836=1.2836
1999 1+0.2087=1.2087

CWI=1(0.9686)( 1.3)( 1.0743)( 1.0994)( 1.0129)( 1.3711)( 1.2268)( 1.331)( 1.2836)( 1.2087)=5.24
Q7. A U.S investor invests in Euro denominated market in from 2000- 2004. The exchange rate in 2000 was 1 Euro=$1.05, and
1 Euro= $1.35 in 2004. The investor bought a EurTel stock for €75 in 2000 and now it is worth €105 in 2004. Calculate the
percentage return in Euros and in dollars.

Euros=(105-75)/75=40%
Dollars= [(105x1.35)-(75x1.05)]/(75x1.05)=80%

Q8.Consider a U.S. investor who invests in WelMex at 40.25 pesos when the value of 1 peso stated in dollars is $0.10. One
year later Walmex is at 52.35 pesos and the stock did not pay a dividend. The peso is now at $0.093, which means that the
dollar appreciated against the peso. Calculate

a) The RR for Welmax RR= (52.35/40.25)=1.3006

b) The TR denominated in dollars. TR=[1.3006(0.093/0.1)]-1=20.95%

Q9.Based on the data from Table below for the 10 years of the 1990s ending in 1999. The TR and RR for the index is given as:
Year S&P 500 TRs % S&P 500 RRs
1990 -3.14 0.9687
1991 30.00 1.3000
1992 7.43 1.0743
1993 9.94 1.0994
1994 1.29 1.0129
1995 37.11 1.3711
1996 22.68 1.2268
1997 33.10 1.3310
1998 28.34 1.2834
1999 20.88 1.2088

Calculate the Arithmetic and geometric means for the years 1990-1999.

AM= (-0.314+0.3+0.0743+0.0994+0.0129+0.3711+0.2268+0.3310+0.2834+0.2088)/10=18.76%

GM= (0.9687)( 1.3000)( 1.0743)( 1.0994)( 1.0129)( 1.3711)( 1.2268)( 1.3310)( 1.2834)( 1.2088)^1/10=18%

Example. As an illustration of how the Arithmetic mean can be misleading in describing returns over multiple periods, consider
the data in table below which shows the movements in price for two stocks over two successive holding periods. Both stocks
have a beginning price of $10. Stock A rises to $20 in period 1 and then declines to $10 in period 2. Stock B falls to $8 in period 1
and then rises 50% to $12 in period 2.
For stock A, the indicated annual average arithmetic rate of change in price is 25% [(100%-50%)/2].
This is clearly not sensible because the price of stock A at the end of period 2 is $10 the same as beginning price. The geometric
mean calculation gives the correct annual average rate of change in price of 0% per year.
For stock B the arithmetic average of the annual percentage changes in price is 15%. However, if the price actually increased 15%
each period the ending price in period 2 would be $10 (1.15)(1.15) =$13.23. We know that this is not correct because the price
the price at the end of period 2 is $12. The annual geometric rate of return, 9.54 % produces the correct price at the end of
period 2: =$10 (1.0954) (1.0954) = $12
Stock Period 0 Period 1 Period 2 Annual Arithmetic Rate of Annual Geometric Rate of
Return Return
A $10 $20 $10 [100%+(-50%)]/2=25% [2.0(0.5)]^1/2 -1=0%
B $10 $8 $12 [-20%+(50%)]/2=15% [0.8(1.5)]^1/2 -1=9.54%
Q9. The total return for the S&P 500 composite in 2004 was 10.87 % (assuming monthly reinvestment of dividends). The rate
of inflation was 3.26 %. What is the real (inflation-adjusted) total return for large common stocks in 2004, as measured by S&P
500?
Real growth rate= (1.1087/1.0326)-1=7.369%

Q10. Consider the period 1926-2011 the geometric mean for S&P composite for the entire period was 9.5% and for CPI 3%.
What is the real (inflation adjusted) geometric mean rate of return for large common stocks for the period 1926-2011.
Real geometric mean= (1.095-1.03)1=6.31%

Q11. The TR for the decade of 1970-1979 is given in the table below. Calculate the standard deviation for this period.

Year TR (%), x (x-x)̅ (x-x)̅ 2

1970 3.51 -3.97 14.97
1971 14.12 6.74 45.42
1972 18.72 11.34 128.59
1973 -14.50 -21.88 478.73
1974 -26.03 -33.41 1116.22
1975 36.92 29.54 872.61
1976 23.64 16.26 264.38
1977 -7.16 -14.54 211.41
1978 6.39 -0.99 0.98
1979 18.19 10.81 116.85

Mean= 73.8/10=7.38
Variance= 3250.196/(10-1)=361.142
Standard deviation= (361.142)^1/2=19.0034%

Q12. Using data with more decimal places than table 6-6 for 1926-2010 for S&P 500 index.
Prove (1+G)2 ≈ (1+AM)2 – (SD)2
(1+0.0957)^2=(1+0.1152)^2-(0.1992)^2
1.204= 1.204

Q13. What is the ending wealth value for common stocks as a result of compounding at 9.6% for 85 years?
Ending wealth= 1(1+0.096)^85=2420.455

Q14. The CWI for common stocks (S&P 500) for 1926-2010 (85 years) was $2364.78 based on a geometric mean of 9.57 % for
that period (rounded to 9.6%) The average dividend yield for those 85 years was 3.99 %.
a) Calculate the CDY in $
(1+0.0399)^85= 27.81%
b) Calculate cumulative price change in $
CPC= CWI/CDY= 2364.78/27.8163=85.014