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ADMS 3530
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Lois King
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Administrative Studies

ADMS 3530

Lois King

Summer

Description

Review Questions 9
Textbook Page Questions
331 2, 3, 4
332 9, 12, 15
333 17, 20, 21, 23
Solutions
2. Dividend yield = 2/40 = .05 = 5%. The dividend yield is unaffected; it is based on the initial price,
not the final price.
Capital gain = $36 – $40 = $4
Capital gains yield = –4/40 = –.10 = – 10%
dividend + capital gain
3. a. Rate of return = price
2 + (38 40)
= = 0
40
1 + nominal rate 1 + 0
Real rate =1 + inflation rate 1 =1 + .03 1 = –.0291 = –2.91%
b. Rate of return = 2 + (40 40) = .05 = 5%
40
1 + nominal rate 1.05
Real rate = 1 = 1 = .0194 = 1.94%
1 + inflation rate 1.03
2 + (42 - 40)
c. Rate of return = 40 = .10 = 10%
Real rate =1 + nominal rate 1 = 1.10 1 = .0680 = 6.80%
1 + inflation rate 1.03 4. Real return = 1 + nominal rate of return 1
1 + inflation rate
1.95
Costaguana: Real return = 1.80 1 = .0833 = 8.33%
1.14
Canada: Real return = 1 = .1067 = 10.67%
1.03
Canada provides the higher real return despite the lower nominal return. Notice that the
approximation
real rate nominal rate – inflation rate
would incorrectly suggest that the Costaguanan real rate was higher than the Canadian real
rate. The approximation is valid only for low rates.
9.
TSX risk Long bond risk
TSX T-Bill Long Bond premium premium
2003 26.61 2.93 8.06 23.68 5.13
2004 14.58 2.24 8.46 12.34 6.22
2005 24.39 2.65 15.05 21.74 12.40
2006 17.01 4.01 3.22 13.00 -0.79
2007 9.83 4.28 3.30 5.55 -0.98
average 18.48 3.22 7.62 15.26 4.40
Std. Dev. 6.95 0.88 4.85 7.43 5.56
b. The average TSX risk premium was 15.26 %. The average long bond risk premium
was 4.4% for these five years. These results are largely due to the very good
performance of the TSX in 2003 to 2007.
c. First, calculate the sample variance, and then take the square root. The sample
variance is the sum of the squared deviations from the mean, divided by the number
of observations minus 1. We illustrate with the TSX risk premium:
Variance of TSX risk premium
= [1/(5-1)] × [(23.68 – 15.26) + (12.34 – 15.26) + (21.74 – 15.26) 2
2 2
+ (13.0 – 15.26) + (5.55 – 15.26)
= 55.20
Standard deviation of TSX risk premium = 55.20 = 7.43%
We would expect that the risk premium standard deviation would be higher for the
- 2 - TSX than for the Long Bond portfolio. This is what we find: the TSX risk premium
has a 7.43% standard deviation and the Long Bond risk premium has a 5.56%
standard deviation. There is more variation in the TSX risk premium because there
is more variation in the TSX return than for the Long Bond portfolio.
12. If investors bec

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