Solution Manual for Fundamentals of Investments Valuation a
hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
1
, Solution Manual for Fundamentals of Investments Valuation a hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
Fundamentals of Investments Valuation and Management, 10th Edition Jordan
hc hc hc hc hc hc hc hc
Chapter 1-21 hc
Chapter 1 hc
A Brief History of Risk and Return
hc hc hc hc hc hc
Concept Questions hc
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, t
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
he higher is its expected return.
hc hc hc hc hc
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then t
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
he dividend yield must be four percent.
hc hc hc hc hc hc
3. It is impossible to lose more than –
hc hc hc hc hc hc hc
100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
100 percent; if returns were truly normally distributed, you could lose much more.
hc hc hc hc hc hc hc hc hc hc hc hc
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, a
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
rithmetic returns do not account for the effects of compounding (and, in particular, the effect of volati
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
lity). Geometric returns do account for the effects of compounding and for changes in the base used f
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
or each year’s calculation of returns. As an investor, the more important return of an asset is the geom
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
etric return. hc
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
approximate a holding period return. When predicting a holding period return, the arithmetic return w
hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ill tend to be too high and the geometric return will tend to be too low. Blume’s formula adjusts these ret
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
urns for different holding period expected returns.
hc hc hc hc hc hc
6. T-
bill rates were highest in the early eighties since inflation at the time was relatively high. As we discu
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ss in our chapter on interest rates, rates on T-
hc hc hc hc hc hc hc hc hc
bills will almost always be slightly higher than the expected rate of inflation.
hc hc hc hc hc hc hc hc hc hc hc hc
7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that r
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
isk premiums are the difference between two returns, so inflation essentially nets out.
hc hc hc hc hc hc hc hc hc hc hc hc
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
are smaller than pretax returns.
hc hc hc hc
2
,Solution Manual for Fundamentals of Investments Valuation a hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
bills actually lost ground (assuming anything other than a very low tax rate). Thus, an all T-
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
bill strategy will probably lose money in real dollars for a taxable investor.
hc hc hc hc hc hc hc hc hc hc hc hc
10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
beyond the investing lifetime for most of us. There have been extended periods during which small st
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ocks have done terribly. Thus, one reason most investors will choose not to pursue a 100 percent stoc
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
k (particularly small-
hc hc
cap stocks) strategy is that many investors have relatively short horizons, and high volatility investmen
hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ts may be very inappropriate in such cases. There are other reasons, but we will defer discussion of th
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ese to later chapters. hc hc hc
11.
Solutions to Questions and Problems hc hc hc hc
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
Due to space and readability constraints, when these intermediate steps are included in this solutions man
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ual, rounding may appear to have occurred. However, the final answer for each problem is found without
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
rounding during any step in the problem.
hc hc hc hc hc hc
Core Questions
hc
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
hc hc hc hc hc hc hc hc hc hc
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
what it would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commis
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
sions and taxes). hc hc
2. Capital gains yield hc hc hc hc $41 – $37 hc hc hc h c / $37 .1081, or 10.81% Dividend yield
hc hc hc hc hc hc hc h c hc $.28/$37 h c hc .0076, or .76% hc hc
Total rate of return 10.81% hc hc hc h c hc h c hc .76% h c hc 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
hc hc hc hc hc hc hc hc hc
Capital gains yield $34 – $37 /$37 h c –.0811, or – h c h c h c h c h c h c h c h c h c
8.11% Dividend yield $.28/$37 hc hc h c hc h c
.0076, or .76% Total rate of return = – 8.11% + .76% = –7.35%
h c hc hc hc hc hc hc hc hc hc hc hc hc hc
4.
a. average return = 6.0%, average risk premium = 2.7%
hc hc hc hc hc hc hc hc
b. average return = 3.3%, average risk premium = 0%hc hc hc hc hc hc hc hc
c. average return = 12.3%, average risk premium = 9.0%
hc hc hc hc hc hc hc hc
d. average return = 16.3%, average risk premium = 13.0%
hc hc hc hc hc hc hc hc
3
, Solution Manual for Fundamentals of Investments Valuation a hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
5. Cherry average return hc hc h c h c 17% h c h c 11% – 2% hc hc h c h c 3% h c h c 14% /5 h c hc 8.60% Straw average returnhc hc hc hc
16% h c h c 18% – 6% hc hc hc hc 1% hc hc 22% /5 hc hc 10.20%
6. Cherry: RA hc hc h c 8.60%
2 2 2 2 2
Var hc h c 1/ 4 hc .17 – .086 hc hc
hc hc
h c .11 – .086 hc hc
hc hc
h c –.02 – .086 hc hc
hc hc
h c .03 – .086 hc hc
hc hc
h c .14 – .086 hc hc
hc hc
h c hc .00623
1/2
Standard deviation hc hc hc .00623 hc hc
hc .0789, or 7.89% hc hc
Straw: RB hc hc hc 10.20%
Var h c h c 1/ 4 hc .16 – .102 hc hc hc
hc 2h c h c hc .18 – .102 hc hc
2h c h c –.06 – .102
hc hc hc
2h c h c hc .01 – .102
hc hc
2h c h c .22 – .102
hc hc hc
2h c
h c
.01452 hc
1/2
Standard deviation hc hc hc .01452 hc
hc hc
hc .1205, or 12.05% hc hc
7. The capital gains yield is
hc hc hc hc h c $59 – $65 /$65 hc hc h c h c –.0923, or – hc hc
9.23% (notice the negative sign). With a dividend yield of 1.2 percent, the total return is –8.03%.
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
8. Geometric return hc hc hc 1 hc hc .17 hc hc 1 hc hc .11 hc hc 1 hc hc .02 hc hc 1 hc hc .03 hc hc 1 hc hc .14 hc
(1/5)h
hc c
–1 hc hc h c .0837,
or 8.37%
hc
9. Arithmetic return hc hc h c .21 hc .12
hc hc hc .07 –.13 – .04 hc hc hc hc hc . hc hc hc .0817, or 8.17% hc hc
(1/6)
Geometric return hc hc 1 hc hc .21 hc hc 1 hc hc .12 hc hc 1 hc hc .07 hc hc 1 – .13
hc hc 1 – .04 hc hc hc hc 1 hc hc .26 – 1
h c h c
.0730, or 7.30% hc hc
Intermediate Questions hc
10. That’s plus or minus one standard deviation, so about two-
hc hc hc hc hc hc hc hc hc
thirds of the time, or two years out of three. In one year out of three, you will be outside this range, implyi
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ng that you will be below it one year out of six and above it one year out of six.
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
4
hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
1
, Solution Manual for Fundamentals of Investments Valuation a hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
Fundamentals of Investments Valuation and Management, 10th Edition Jordan
hc hc hc hc hc hc hc hc
Chapter 1-21 hc
Chapter 1 hc
A Brief History of Risk and Return
hc hc hc hc hc hc
Concept Questions hc
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, t
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
he higher is its expected return.
hc hc hc hc hc
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then t
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
he dividend yield must be four percent.
hc hc hc hc hc hc
3. It is impossible to lose more than –
hc hc hc hc hc hc hc
100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
100 percent; if returns were truly normally distributed, you could lose much more.
hc hc hc hc hc hc hc hc hc hc hc hc
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, a
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
rithmetic returns do not account for the effects of compounding (and, in particular, the effect of volati
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
lity). Geometric returns do account for the effects of compounding and for changes in the base used f
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
or each year’s calculation of returns. As an investor, the more important return of an asset is the geom
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
etric return. hc
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
approximate a holding period return. When predicting a holding period return, the arithmetic return w
hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ill tend to be too high and the geometric return will tend to be too low. Blume’s formula adjusts these ret
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
urns for different holding period expected returns.
hc hc hc hc hc hc
6. T-
bill rates were highest in the early eighties since inflation at the time was relatively high. As we discu
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ss in our chapter on interest rates, rates on T-
hc hc hc hc hc hc hc hc hc
bills will almost always be slightly higher than the expected rate of inflation.
hc hc hc hc hc hc hc hc hc hc hc hc
7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that r
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
isk premiums are the difference between two returns, so inflation essentially nets out.
hc hc hc hc hc hc hc hc hc hc hc hc
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
are smaller than pretax returns.
hc hc hc hc
2
,Solution Manual for Fundamentals of Investments Valuation a hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
bills actually lost ground (assuming anything other than a very low tax rate). Thus, an all T-
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
bill strategy will probably lose money in real dollars for a taxable investor.
hc hc hc hc hc hc hc hc hc hc hc hc
10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
beyond the investing lifetime for most of us. There have been extended periods during which small st
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ocks have done terribly. Thus, one reason most investors will choose not to pursue a 100 percent stoc
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
k (particularly small-
hc hc
cap stocks) strategy is that many investors have relatively short horizons, and high volatility investmen
hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ts may be very inappropriate in such cases. There are other reasons, but we will defer discussion of th
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ese to later chapters. hc hc hc
11.
Solutions to Questions and Problems hc hc hc hc
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
Due to space and readability constraints, when these intermediate steps are included in this solutions man
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ual, rounding may appear to have occurred. However, the final answer for each problem is found without
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
rounding during any step in the problem.
hc hc hc hc hc hc
Core Questions
hc
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
hc hc hc hc hc hc hc hc hc hc
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
what it would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commis
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
sions and taxes). hc hc
2. Capital gains yield hc hc hc hc $41 – $37 hc hc hc h c / $37 .1081, or 10.81% Dividend yield
hc hc hc hc hc hc hc h c hc $.28/$37 h c hc .0076, or .76% hc hc
Total rate of return 10.81% hc hc hc h c hc h c hc .76% h c hc 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
hc hc hc hc hc hc hc hc hc
Capital gains yield $34 – $37 /$37 h c –.0811, or – h c h c h c h c h c h c h c h c h c
8.11% Dividend yield $.28/$37 hc hc h c hc h c
.0076, or .76% Total rate of return = – 8.11% + .76% = –7.35%
h c hc hc hc hc hc hc hc hc hc hc hc hc hc
4.
a. average return = 6.0%, average risk premium = 2.7%
hc hc hc hc hc hc hc hc
b. average return = 3.3%, average risk premium = 0%hc hc hc hc hc hc hc hc
c. average return = 12.3%, average risk premium = 9.0%
hc hc hc hc hc hc hc hc
d. average return = 16.3%, average risk premium = 13.0%
hc hc hc hc hc hc hc hc
3
, Solution Manual for Fundamentals of Investments Valuation a hc hc hc hc hc hc hc
nd Management, 10th Edition by Bradford Jordan and Thom
hc hc hc hc hc hc hc hc
as Miller and Steve Dolvin
hc hc hc hc
5. Cherry average return hc hc h c h c 17% h c h c 11% – 2% hc hc h c h c 3% h c h c 14% /5 h c hc 8.60% Straw average returnhc hc hc hc
16% h c h c 18% – 6% hc hc hc hc 1% hc hc 22% /5 hc hc 10.20%
6. Cherry: RA hc hc h c 8.60%
2 2 2 2 2
Var hc h c 1/ 4 hc .17 – .086 hc hc
hc hc
h c .11 – .086 hc hc
hc hc
h c –.02 – .086 hc hc
hc hc
h c .03 – .086 hc hc
hc hc
h c .14 – .086 hc hc
hc hc
h c hc .00623
1/2
Standard deviation hc hc hc .00623 hc hc
hc .0789, or 7.89% hc hc
Straw: RB hc hc hc 10.20%
Var h c h c 1/ 4 hc .16 – .102 hc hc hc
hc 2h c h c hc .18 – .102 hc hc
2h c h c –.06 – .102
hc hc hc
2h c h c hc .01 – .102
hc hc
2h c h c .22 – .102
hc hc hc
2h c
h c
.01452 hc
1/2
Standard deviation hc hc hc .01452 hc
hc hc
hc .1205, or 12.05% hc hc
7. The capital gains yield is
hc hc hc hc h c $59 – $65 /$65 hc hc h c h c –.0923, or – hc hc
9.23% (notice the negative sign). With a dividend yield of 1.2 percent, the total return is –8.03%.
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
8. Geometric return hc hc hc 1 hc hc .17 hc hc 1 hc hc .11 hc hc 1 hc hc .02 hc hc 1 hc hc .03 hc hc 1 hc hc .14 hc
(1/5)h
hc c
–1 hc hc h c .0837,
or 8.37%
hc
9. Arithmetic return hc hc h c .21 hc .12
hc hc hc .07 –.13 – .04 hc hc hc hc hc . hc hc hc .0817, or 8.17% hc hc
(1/6)
Geometric return hc hc 1 hc hc .21 hc hc 1 hc hc .12 hc hc 1 hc hc .07 hc hc 1 – .13
hc hc 1 – .04 hc hc hc hc 1 hc hc .26 – 1
h c h c
.0730, or 7.30% hc hc
Intermediate Questions hc
10. That’s plus or minus one standard deviation, so about two-
hc hc hc hc hc hc hc hc hc
thirds of the time, or two years out of three. In one year out of three, you will be outside this range, implyi
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
ng that you will be below it one year out of six and above it one year out of six.
hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc hc
4
