Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
TESTBAN FOR Solution Manual For FUNDAMENTALS OF INVESTMENTS
AND MANAGEMENTS 10TH EDITION
1
, Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
Fundamentals of Investments Valuation and Management, 10th Edition Jordan
Chapter 1-21
Chapter 1
A Brief History of Risk and Return
Concept Questions
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher
is its expected return.
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the
dividend yield must be four percent.
3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on
the lower tail at –100 percent; if returns were truly normally distributed, you could lose much more.
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, arithmetic
returns do not account for the effects of compounding (and, in particular, the effect of volatility). Geometric
returns do account for the effects of compounding and for changes in the base used for each year’s calculation
of returns. As an investor, the more important return of an asset is the geometric return.
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to approximate
a holding period return. When predicting a holding period return, the arithmetic return will tend to be too high
and the geometric return will tend to be too low. Blume’s formula adjusts these returns for different holding
period expected returns.
6. T-bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in our
chapter on interest rates, rates on T-bills will almost always be slightly higher than the expected rate of inflation.
,Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that risk
premiums are the difference between two returns, so inflation essentially nets out.
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are smaller
than pretax returns.
3
, Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-bills actually lost
ground (assuming anything other than a very low tax rate). Thus, an all T-bill strategy will probably lose money
in real dollars for a taxable investor.
10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well beyond
the investing lifetime for most of us. There have been extended periods during which small stocks have done
terribly. Thus, one reason most investors will choose not to pursue a 100 percent stock (particularly small-cap
stocks) strategy is that many investors have relatively short horizons, and high volatility investments may be very
inappropriate in such cases. There are other reasons, but we will defer discussion of these to later chapters.
11.
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due
to space and readability constraints, when these intermediate steps are included in this solutions manual,
rounding may appear to have occurred. However, the final answer for each problem is found without rounding
during any step in the problem.
Core Questions
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what it
would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commissions and taxes).
2. Capital gains yield $41 – $37 / $37 .1081, or 10.81% Dividend yield $.28/$37 .0076, or .76% Total rate
of return 10.81% .76% 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
Capital gains yield $34 – $37 /$37 –.0811, or –8.11%
Dividend yield $.28/$37 .0076, or .76% Total rate of return = –
8.11% + .76% = –7.35%
4.
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
TESTBAN FOR Solution Manual For FUNDAMENTALS OF INVESTMENTS
AND MANAGEMENTS 10TH EDITION
1
, Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
Fundamentals of Investments Valuation and Management, 10th Edition Jordan
Chapter 1-21
Chapter 1
A Brief History of Risk and Return
Concept Questions
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher
is its expected return.
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the
dividend yield must be four percent.
3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on
the lower tail at –100 percent; if returns were truly normally distributed, you could lose much more.
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, arithmetic
returns do not account for the effects of compounding (and, in particular, the effect of volatility). Geometric
returns do account for the effects of compounding and for changes in the base used for each year’s calculation
of returns. As an investor, the more important return of an asset is the geometric return.
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to approximate
a holding period return. When predicting a holding period return, the arithmetic return will tend to be too high
and the geometric return will tend to be too low. Blume’s formula adjusts these returns for different holding
period expected returns.
6. T-bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in our
chapter on interest rates, rates on T-bills will almost always be slightly higher than the expected rate of inflation.
,Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that risk
premiums are the difference between two returns, so inflation essentially nets out.
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are smaller
than pretax returns.
3
, Solution Manual for Fundamentals of Investments
Valuation and Management, 10th Edition by Bradford
Jordan and Thomas Miller and Steve Dolvin
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-bills actually lost
ground (assuming anything other than a very low tax rate). Thus, an all T-bill strategy will probably lose money
in real dollars for a taxable investor.
10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well beyond
the investing lifetime for most of us. There have been extended periods during which small stocks have done
terribly. Thus, one reason most investors will choose not to pursue a 100 percent stock (particularly small-cap
stocks) strategy is that many investors have relatively short horizons, and high volatility investments may be very
inappropriate in such cases. There are other reasons, but we will defer discussion of these to later chapters.
11.
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due
to space and readability constraints, when these intermediate steps are included in this solutions manual,
rounding may appear to have occurred. However, the final answer for each problem is found without rounding
during any step in the problem.
Core Questions
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what it
would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commissions and taxes).
2. Capital gains yield $41 – $37 / $37 .1081, or 10.81% Dividend yield $.28/$37 .0076, or .76% Total rate
of return 10.81% .76% 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
Capital gains yield $34 – $37 /$37 –.0811, or –8.11%
Dividend yield $.28/$37 .0076, or .76% Total rate of return = –
8.11% + .76% = –7.35%
4.
