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