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FIN 310 Chapter Notes - Chapter 5: Risk Aversion, Standard Deviation, Scenario Analysis

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sapphiregnat826
17 Oct 2016
School
Quinnipiac University
Department
Finance
Course
FIN 310
Professor
Benjamin Abugri

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Document Summary

Holding-period return (hpr) rate of return over a given investment period : Holding period return = (ending price beginning price + cash dividend)/ beginning price. Arithmetic average the sum of return in each period dividends by the number of periods. Geometric average the single per-period return that gives the same cumulative performance as the sequence of actual return. Dollar-weighted average return the internal rate of return on an investment. Annual percentage rate (apr annualize per-period rates using a simple interest approach, ignoring compound interest: Apr = per-period rate x periods per year. Apr = [(1 + ear)1/n - 1] x n. 1 + ear = eapr apr = ln(1 + ear) = rcc. Effective annual rate (ear) when are n compounding periods in the year, we first recover the rate period as apr/n and then compound that rate for the number of periods in a year: 1+ear = (1 + rate per period) = (1 + (apr/n))n.

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Related Questions

10(a)

Suppose a stock had an initial price of $86 per share, paid a dividend of $1.80 per share during the year, and had an ending share price of $94.

Compute the percentage total return. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Total return %

10(b)

Returns
Year X Y
1 13 % 18 %
2 27 28
3 – 20 – 25
4 8 10
5 10 19

Using the returns shown above, calculate the average returns, the variances, and the standard deviations for X and Y (Do not round intermediate calculations and round your final percentage answer to 2 decimal places. (e.g., 32.16) and variances to 5 decimal places. (e.g., 32.16161))

X Y
Average returns % %
Variances
Standard deviations % %

10(c)

You purchased a zero coupon bond one year ago for $173.85. The market interest rate is now 9 percent. If the bond had 20 years to maturity when you originally purchased it, what was your total return for the past year? Assume semiannual compounding. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Total return %

10(d)

You bought a share of 3 percent preferred stock for $97.48 last year. The market price for your stock is now $99.69

What was your total return for last year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Total return %

10(e)

You bought a stock three months ago for $43.28 per share. The stock paid no dividends. The current share price is $46.51

What is the APR of your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

APR %

What is the EAR of your investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

EAR %

Assume that you have $1,000 to invest, so insert 1000 as your Present Value in the following table. Assume that you want to invest your money for 5 years (insert 5 for Number of Periods). Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The table will determine the Future Value of your investment. If you input the numbers correctly, your Future Value is computed to be $1.159, which is what your investment will be worth in 5 years. Now revise the input to reflect your actual savings and the prevailing interest rate so that you can see how your savings will grow in 5 years. Even if you have no savings now, you can at least see how the interest rate affects the future value of savings by revising your input in the Interest Rate per Period and then observing the change in the Future Value. Future Value of a Present Amount Present Value $1,500 Number of Periods 5 Interest Rate per Period 3.0% FV = PV*(1+R)^N Future Value $1,739 2. Assume that you have $1,000 to invest at the end of each of the next 5 years, so insert 1000 as your Payment per Period in the following table. Assume that you want to invest your money for 5 years (insert 5 for Number of Periods). Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Future Value of your investment. If you input the numbers correctly, your Future Value is computed to be $5,309, which is what your investments will be worth in 5 years. Now revise the input to reflect your actual expected savings per year over the next 5 years, and existing interest rate quotations so that you can estimate how your savings will grow in 5 years. You can now revise the table to fit your own desired level of saving. Future Value of an Annuity Payment per Period $1,500 Number of Periods 5 Interest Rate per Period 3.0% FV = FV(R, N, PMT, (PV), beginning=1, end=0) Future Value $7,964 3. Assume that you want to deposit savings that will be worth $10,000 in 5 years, so insert 10000 as the Future Amount and 5 as the Number of Periods in the following table. Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Present Value, which represents the amount of savings you need today that would accumulate to be worth $10,000 in 5 years. If you input the numbers correctly, the Present Value is estimated in the table to be $8,606. Now revise the input to reflect your own desired savings amount in 5 years so that you can estimate how much you need now to achieve your savings goal in 5 years. Present Value of a Future Amount Future Amount $20,000 Number of Periods 5 Interest Rate per Period 3.0% PV = FV / (1+R)^N Present Value $17,252 4. Assume that you want to deposit savings at the end of each of the next 5 years so that you will have $10,000 in 5 years. So insert 10000 as the Future Amount and 5 for Number of Periods. Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Annual Payment, which represents the annual payments that will accumulate to your future desired investment. If you input the numbers correctly, your Annual Payment is computed to be $1,884. Now revise the input to reflect your own desired savings amount in 5 years so that you can estimate how much you need to save per year to achieve your savings goal in 5 years. Compute Payment Needed to Achieve Future Amount Future Amount $20,000.00 Number of Periods 5.00 Interest Rate per Period 3.00% PMT = FV / [FV(R, N, -1)] Annual Payment $3,767

Decisions 1. Using the above formulas and understanding of the impact of interest rates and time on your savings, report on how much you must save per year and the return you must earn to meet your savings goal for graduation, and your savings goal in your first three years of post-graduation life.

I need a report on how much to save per year and the return to earn to meet savings goal for graduation, and savings goal in the first three years of post graduation. Can you please use the numbers above that are already calculated in the formula. I have had an answer on this below. I don't understand why the periods don't stay the same for 5 years. The annuity is 7964 I took that divided b y 60 = 132.7 per month and multiplied it by 12 for a year and got 1592.4. Is that the savings for the answer to saving for a year. IF not I need help figuring out the calculation for the return to meet after gradutaion and the next three years post graduation.

Goal 1 Savings Goal for graduation, FV $ 20,000
Time till graduation (Number of periods) 5
Present value of savings $ -
Expected interest rates 3%
Savings needed per year, PMT $3,767.09 =PMT(3%,5,0,20000,)
Goal 2 Savings Goal for 1st year of post graduation, FV $ 15,000
Time till post graduation year 1 (Number of periods) 6
Present value of savings $ -
Expected interest rates 3%
Savings needed per year, PMT $2,318.96 =PMT(3%,6,0,15000,)
Goal 3 Savings Goal for 2nd year of post graduation, FV $ 15,300
Time till post graduation year 1 (Number of periods) 7
Present value of savings $ -
Expected interest rates 3%
Savings needed per year, PMT $1,996.75 =PMT(3%,7,0,15300,)
Goal 4 Savings Goal for 3rd year of post graduation, FV $ 15,606
Time till post graduation year 1 (Number of periods) 8
Present value of savings $ -
Expected interest rates 3%
Savings needed per year, PMT $1,754.99 =PMT(3%,8,0,15606,)

Part 1:

Blair purchased 300 shares of stock last year at a total cost of $13,380. He has received a total of $600 in dividends on these shares. Today, Blair sold the shares at a price per share of $35. What is his total return in dollars on this investment?

$300

$-2,280

$-2,580

$-300

Part 2:

Chase Bank pays an annual dividend of $1.17 per share on its common stock. One year ago, this stock sold for $54.00 per share. Today, the stock is priced to sell at $32.20 a share. What is the capital gains yield?

-33.62 percent

-38.18 percent

-29.45 percent

-40.37 percent

Part 3:

A stock produced the following returns over the past 5 years: 13.5 percent, 4.3 percent, -14.4 percent, 22.9 percent, and 11.3 percent. What is the arithmetic average risk premium for this stock if the average risk-free rate for the period was 4.4 percent?

3.12 percent

3.82 percent

2.92 percent

3.62 percent