SOLUTION MANUAL FOR
u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan
uj uj uj uj uj uj uj uj
1
,SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
Chapter1-21 uj
Chapter1 uj
A Brief History of Risk and Return
uj uj uj uj uj uj
Concept Questions uj
1. Forboth risk and return, increasingorder is b, c, a, d. Onaverage, the higher the risk of aninvestment, the hig
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
her is its expected return.
uj uj uj uj
2. Since the price didn’t change, the capital gains yield was zero. Ifthe total return was fourpercent, then the di
uj uj uj uj uj uj uj uj uj uj u j uj uj uj uj uj uj uj uj uj
vidend yield must be four percent. uj uj uj uj uj
3. It is impossible to lose more than –
uj uj uj uj uj uj uj
100 percent of your investment. Therefore, return distributions are cutoff onthe lower tail at –
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
100percent; if returns were truly normally distributed,youcould lose much more.
uj uj uj uj uj uj uj uj uj uj uj uj
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, arithm
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
etic returns do not account for the effects of compounding (and, in particular, the effect of volatility). Geo
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
metric returns do account for the effects of compounding and for changes in the base used for each year’s c
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
alculation of returns. As an investor, the more important return of an asset is the geometric return.
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to appr
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
oximate a holding period return. When predicting a holding period return, the arithmetic return willtend to
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
be too high and the geometric returnwill tend to be too low. Blume’s formula adjusts these returns for differe
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
nt holding period expected returns.
uj uj uj uj
6. T-
bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
our chapter on interest rates, rates on T-
uj uj uj uj uj uj uj
bills will almost always be slightly higher than the expected rate of inflation.
uj uj uj uj uj uj uj uj uj uj uj uj
7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that risk p
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
remiums are the difference between two returns, so inflation essentially nets out.
uj uj uj uj uj uj uj uj uj uj uj
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are s
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
maller than pretax returns. uj uj uj
2
,SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
bills actually lost ground (assuming anything other than a very lowtaxrate). Thus, anall T-
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
bill strategy will probably lose money in real dollars for a taxable investor.
uj uj uj uj uj uj uj uj uj uj uj uj
10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well beyon
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
d the investing lifetime for most of us. There have been extended periods during which small stocks have
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
done terribly. Thus, one reason most investors will choose not to pursue a 100 percent stock (particularly s
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
mall-
cap stocks) strategy is that many investors have relatively short horizons,and high volatility investments m
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
ay be very inappropriate in such cases. There are other reasons, but we will defer discussion of these to late
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
r chapters. uj
11.
Solutions to Questions and Problems uj uj uj uj
NOTE:All end of chapter problemswere solved using aspreadsheet. Many problemsrequire multiplesteps. Due t
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
o space and readability constraints, when these intermediate steps are included in this solutions manual, roun
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
ding may appear to have occurred. However, the final answer for each problem is found without rounding duri
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
ng any step in the problem.
uj uj uj uj uj
Core Questions uj
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
uj uj uj uj uj uj uj uj uj uj
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what i
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
t would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commissions and ta
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
xes).
2. Capital gains yield uj uj uj u j $41 – $37 uj uj uj u j / $37 .1081, or 10.81% Dividend yield
uj u j uj uj uj uj uj u j uj $.28/$37 .0076, or .76% u j uj uj uj
Totalrate of return 10.81% uj uj uj u j uj u j u j .76% u j uj 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
uj uj uj uj uj uj uj uj uj
Capital gains yield $34 – $37 /$37 –.0811, or –u j u j u j u j u j u j u j u j u j u j
8.11% Dividend yield $.28/$37 uj uj u j u j u j
u.0076, or .76% Total rate of return = – 8.11% + .76% = –7.35%
j uj uj uj uj uj uj uj uj uj uj uj uj uj
4.
a. average return = 6.0%, average risk premium= 2.7% uj uj uj uj uj uj uj uj
b. average return = 3.3%, average risk premium= 0% uj uj uj uj uj uj uj uj
c. average return = 12.3%, average risk premium = 9.0% uj uj uj uj uj uj uj uj
d. average return = 16.3%, average risk premium = 13.0% uj uj uj uj uj uj uj uj
3
, SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
5. Cherry average return uj uj u j u j 17% u j u j 11% – 2% uj uj u j u j 3% u j u j 14% /5 u j uj 8.60% Straw average return u j u j u j uj
16% u j u j 18% – 6% 1% 22% /5 10.20% uj uj u j uj u j uj uj uj
6. Cherry:RA 8.60% uj uj u j
2 2 2 2 2
Var u j u j 1/ 4 uj .17 – .086 uj uj
uj uj
u j .11 – .086 uj uj
uj uj
u j –.02 – .086 uj uj
uj uj
u j .03 – .086 uj uj
uj uj
u j .14 – .086 uj uj
uj uj
u j u j .00623
1/2
Standard deviation uj uj u j .00623 uj uj
u j .0789, or 7.89% uj uj
Straw: RB 10.20% uj uj u j
Var u j u j 1/ 4 uj .16 – .102 uj uj uj
uj 2 u j
u j uj .18 – .102 uj uj
2 u j
u j –.06 – .102
uj uj uj
2 u j
u j .01 – .102
uj uj uj
2 u j
u j .22 – .102
uj uj uj
2 uj
u j
.01452 uj
1/2
Standarddeviation uj uj uj .01452 uj
uj uj
uj .1205, or 12.05% uj uj
7. The capital gains yield is
uj uj uj uj u j $59 – $65 /$65 uj uj u j u j –.0923, or – uj uj
9.23% (notice the negative sign). Witha dividend yield of 1.2 percent, the total return is –8.03%.
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
8. Geometricreturn uj uj u j 1 .17 uj uj uj uj 1 .11 uj uj uj uj 1 .02 uj uj uj uj 1 .03 uj uj uj uj 1 .14 uj uj uj
(1/5)
uj u j
–1 .0837,
uj uj u j
or 8.37%
uj
9. Arithmetic return uj uj u j .21 .12 .07 –.13 – .04 . .0817, or 8.17%
u j uj u j uj uj uj uj u j uj uj uj u j uj uj
(1/6)
Geometricreturn uj uj 1 .21 uj u j uj uj 1 .12 uj uj uj uj 1 .07 uj uj uj u j 1 – .13 uj uj 1 – .04 uj uj uj uj 1 .26uj u j – 1 u j u j
.0730, or 7.30% uj uj
Intermediate Questions uj
10. That’s plus or minus one standard deviation, so about two-
uj uj uj uj uj uj uj uj uj
thirds of the time, or two years out of three. In one year out of three, you will be outside this range, implying that
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
you will be below it one year out of six and above it one year out of six.
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
4
u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan
uj uj uj uj uj uj uj uj
1
,SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
Chapter1-21 uj
Chapter1 uj
A Brief History of Risk and Return
uj uj uj uj uj uj
Concept Questions uj
1. Forboth risk and return, increasingorder is b, c, a, d. Onaverage, the higher the risk of aninvestment, the hig
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
her is its expected return.
uj uj uj uj
2. Since the price didn’t change, the capital gains yield was zero. Ifthe total return was fourpercent, then the di
uj uj uj uj uj uj uj uj uj uj u j uj uj uj uj uj uj uj uj uj
vidend yield must be four percent. uj uj uj uj uj
3. It is impossible to lose more than –
uj uj uj uj uj uj uj
100 percent of your investment. Therefore, return distributions are cutoff onthe lower tail at –
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
100percent; if returns were truly normally distributed,youcould lose much more.
uj uj uj uj uj uj uj uj uj uj uj uj
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, arithm
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
etic returns do not account for the effects of compounding (and, in particular, the effect of volatility). Geo
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
metric returns do account for the effects of compounding and for changes in the base used for each year’s c
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
alculation of returns. As an investor, the more important return of an asset is the geometric return.
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to appr
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
oximate a holding period return. When predicting a holding period return, the arithmetic return willtend to
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
be too high and the geometric returnwill tend to be too low. Blume’s formula adjusts these returns for differe
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
nt holding period expected returns.
uj uj uj uj
6. T-
bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
our chapter on interest rates, rates on T-
uj uj uj uj uj uj uj
bills will almost always be slightly higher than the expected rate of inflation.
uj uj uj uj uj uj uj uj uj uj uj uj
7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that risk p
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
remiums are the difference between two returns, so inflation essentially nets out.
uj uj uj uj uj uj uj uj uj uj uj
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are s
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
maller than pretax returns. uj uj uj
2
,SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
bills actually lost ground (assuming anything other than a very lowtaxrate). Thus, anall T-
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
bill strategy will probably lose money in real dollars for a taxable investor.
uj uj uj uj uj uj uj uj uj uj uj uj
10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well beyon
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
d the investing lifetime for most of us. There have been extended periods during which small stocks have
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
done terribly. Thus, one reason most investors will choose not to pursue a 100 percent stock (particularly s
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
mall-
cap stocks) strategy is that many investors have relatively short horizons,and high volatility investments m
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
ay be very inappropriate in such cases. There are other reasons, but we will defer discussion of these to late
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
r chapters. uj
11.
Solutions to Questions and Problems uj uj uj uj
NOTE:All end of chapter problemswere solved using aspreadsheet. Many problemsrequire multiplesteps. Due t
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
o space and readability constraints, when these intermediate steps are included in this solutions manual, roun
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
ding may appear to have occurred. However, the final answer for each problem is found without rounding duri
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
ng any step in the problem.
uj uj uj uj uj
Core Questions uj
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
uj uj uj uj uj uj uj uj uj uj
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what i
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
t would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commissions and ta
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
xes).
2. Capital gains yield uj uj uj u j $41 – $37 uj uj uj u j / $37 .1081, or 10.81% Dividend yield
uj u j uj uj uj uj uj u j uj $.28/$37 .0076, or .76% u j uj uj uj
Totalrate of return 10.81% uj uj uj u j uj u j u j .76% u j uj 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
uj uj uj uj uj uj uj uj uj
Capital gains yield $34 – $37 /$37 –.0811, or –u j u j u j u j u j u j u j u j u j u j
8.11% Dividend yield $.28/$37 uj uj u j u j u j
u.0076, or .76% Total rate of return = – 8.11% + .76% = –7.35%
j uj uj uj uj uj uj uj uj uj uj uj uj uj
4.
a. average return = 6.0%, average risk premium= 2.7% uj uj uj uj uj uj uj uj
b. average return = 3.3%, average risk premium= 0% uj uj uj uj uj uj uj uj
c. average return = 12.3%, average risk premium = 9.0% uj uj uj uj uj uj uj uj
d. average return = 16.3%, average risk premium = 13.0% uj uj uj uj uj uj uj uj
3
, SOLUTION MANUAL FOR u j u j
Fundamentalsof Investments Valuation andManagement,10th Edition Jordan uj uj uj uj uj uj uj uj
5. Cherry average return uj uj u j u j 17% u j u j 11% – 2% uj uj u j u j 3% u j u j 14% /5 u j uj 8.60% Straw average return u j u j u j uj
16% u j u j 18% – 6% 1% 22% /5 10.20% uj uj u j uj u j uj uj uj
6. Cherry:RA 8.60% uj uj u j
2 2 2 2 2
Var u j u j 1/ 4 uj .17 – .086 uj uj
uj uj
u j .11 – .086 uj uj
uj uj
u j –.02 – .086 uj uj
uj uj
u j .03 – .086 uj uj
uj uj
u j .14 – .086 uj uj
uj uj
u j u j .00623
1/2
Standard deviation uj uj u j .00623 uj uj
u j .0789, or 7.89% uj uj
Straw: RB 10.20% uj uj u j
Var u j u j 1/ 4 uj .16 – .102 uj uj uj
uj 2 u j
u j uj .18 – .102 uj uj
2 u j
u j –.06 – .102
uj uj uj
2 u j
u j .01 – .102
uj uj uj
2 u j
u j .22 – .102
uj uj uj
2 uj
u j
.01452 uj
1/2
Standarddeviation uj uj uj .01452 uj
uj uj
uj .1205, or 12.05% uj uj
7. The capital gains yield is
uj uj uj uj u j $59 – $65 /$65 uj uj u j u j –.0923, or – uj uj
9.23% (notice the negative sign). Witha dividend yield of 1.2 percent, the total return is –8.03%.
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
8. Geometricreturn uj uj u j 1 .17 uj uj uj uj 1 .11 uj uj uj uj 1 .02 uj uj uj uj 1 .03 uj uj uj uj 1 .14 uj uj uj
(1/5)
uj u j
–1 .0837,
uj uj u j
or 8.37%
uj
9. Arithmetic return uj uj u j .21 .12 .07 –.13 – .04 . .0817, or 8.17%
u j uj u j uj uj uj uj u j uj uj uj u j uj uj
(1/6)
Geometricreturn uj uj 1 .21 uj u j uj uj 1 .12 uj uj uj uj 1 .07 uj uj uj u j 1 – .13 uj uj 1 – .04 uj uj uj uj 1 .26uj u j – 1 u j u j
.0730, or 7.30% uj uj
Intermediate Questions uj
10. That’s plus or minus one standard deviation, so about two-
uj uj uj uj uj uj uj uj uj
thirds of the time, or two years out of three. In one year out of three, you will be outside this range, implying that
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
you will be below it one year out of six and above it one year out of six.
uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj uj
4
