Solution manual for Fundamentals of Investments Valuation and Management 10th Edition by Jordan Miller Dolvin

SOLUTION MANUAL FOR M M


Fundamentals of Investments Valuation and Management, 10th Edition Jordan
M M M M M M M M



Chapter 1-21 M




Chapter 1 M


A Brief History of Risk and Return
M M M M M M




Concept Questions
M




1. ForMbothMriskMandMreturn,MincreasingMorderMisMb,Mc,Ma,Md.MOnMaverage,MtheMhigherMtheMriskMofManMin
vestment,MtheMhigherMisMitsMexpectedMreturn.

2. SinceMtheMpriceMdidn’tMchange,MtheMcapitalMgainsMyieldMwasMzero.MIfMtheMtotalMreturnMwasMfourMperc
ent,MthenMtheMdividendMyieldMmustMbeMfourMpercent.

3. ItM isM impossibleM toM loseM moreM thanM –
100M percentM ofM yourM investment.M Therefore,M returnM distributionsMareMcutMoffMonMtheMlowerMtailMatM
–100Mpercent;MifMreturnsMwereMtrulyMnormallyMdistributed,MyouMcouldMloseMmuchMmore.

4. ToMcalculateManMarithmeticMreturn,MyouMsumMtheMreturnsMandMdivideMbyMtheMnumberMofMreturns.MAsM
such,MarithmeticMreturnsMdoMnotMaccountMforMtheMeffectsMofMcompoundingM(and,MinMparticular,MtheMe
ffectMofMvolatility).MGeometricMreturnsMdoMaccountMforMtheMeffectsMofMcompoundingMandMforMchange
sMinMtheMbaseMusedM forM eachM year’sM calculationM ofM returns.M AsM anM investor,M theM moreM importantM r
eturnM ofM anM assetM isMtheMgeometricMreturn.

5. Blume’sMformulaMusesMtheMarithmeticMandMgeometricMreturnsMalongMwithMtheMnumberMofMobservatio
nsMtoMapproximateMaMholdingMperiodMreturn.MWhenMpredictingMaMholdingMperiodMreturn,MtheMarithme
ticMreturnMwillMtendMtoMbeMtooMhighMandMtheMgeometricMreturnMwillMtendMtoMbeMtooMlow.MBlume’sMfo
rmulaMadjustsMtheseMreturnsMforMdifferentMholdingMperiodMexpectedMreturns.

6. T-
billMratesMwereMhighestMinMtheMearlyMeightiesMsinceMinflationMatMtheMtimeMwasMrelativelyMhigh.MAsMw
eMdiscussMinMourMchapterMonMinterestMrates,MratesMonMT-
billsMwillMalmostMalwaysMbeMslightlyMhigherMthanMtheMexpectedMrateMofMinflation.

7. RiskMpremiumsMareMaboutMtheMsameMregardlessMofMwhetherMweMaccountMforMinflation.MTheMreasonMi
sMthatMriskMpremiumsMareMtheMdifferenceMbetweenMtwoMreturns,MsoMinflationMessentiallyMnetsMout.

8. Returns,MriskMpremiums,MandMvolatilityMwouldMallMbeMlowerMthanMweMestimatedMbecauseMaftertaxMret
urnsMareMsmallerMthanMpretaxMreturns.

9. WeMhaveMseenMthatMT-
billsMbarelyMkeptMupMwithMinflationMbeforeMtaxes.MAfterMtaxes,MinvestorsMinMT-
billsMactuallyMlostMgroundM(assumingManythingMotherMthanMaMveryMlowMtaxMrate).MThus,ManMallMT-
billMstrategyMwillMprobablyMloseMmoneyMinMrealMdollarsMforMaMtaxableMinvestor.

10. ItM isM importantM notM toM loseM sightM ofM theM factM thatM theM resultsM weM haveM discussedM coverM overM 80
M years,M wellMbeyondMtheMinvestingMlifetimeMforMmostMofMus.MThereMhaveMbeenMextendedMperiodsMdur
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, ingMwhichMsmallM stocksM haveM doneM terribly.M Thus,M oneM reasonM mostM investorsM willM chooseM notM
toM pursueM aM 100




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WRITTENMCONSENTMOFMMCGRAWMHILLMLLC.

, percentMstockM(particularlyMsmall-
capMstocks)MstrategyMisMthatMmanyMinvestorsMhaveMrelativelyMshortMhorizons,MandMhighMvolatilityMinv
estmentsMmayMbeMveryMinappropriateMinMsuchMcases.MThereMareMotherMreasons,MbutMweMwillMdeferMdi
scussionMofMtheseMtoMlaterMchapters.

11.

SolutionsMtoMQuestionsMandMProblems

NOTE:MAllMendMofMchapterMproblemsMwereMsolvedMusingMaMspreadsheet.MManyMproblemsMrequireMmultipl
eMsteps.MDueMtoMspaceMandMreadabilityMconstraints,MwhenMtheseMintermediateMstepsMareMincludedMinMthisM
solutionsMmanual,MroundingMmayMappearMtoMhaveMoccurred.MHowever,MtheMfinalManswerMforMeachMproble
mMisMfoundMwithoutMroundingMduringManyMstepMinMtheMproblem.

CoreMQuestions

1.MMM TotalMdollarMreturnM=M100($41M–M$37M+M$.28)M=M$428.00
WhetherMyouMchooseMtoMsellMtheMstockMdoesMnotMaffectMtheMgainMorMlossMforMtheMyear;MyourMstockMi
sMworthMwhatMitMwouldMbringMifMyouMsoldMit.MWhetherMyouMchooseMtoMdoMsoMorMnotMisMirrelevantM(i
gnoringMcommissionsMandMtaxes).

2. CapitalMgainsMyieldM $41 M – M.1081,M orM10.81%

M $37M/M$37
DividendMyiel M $.28M/M$3 M .0076,M orM.76%
d 7
TotalMrateMofMretur M10.81 M .76 M 11.57%
n % %
3. DollarMreturnM=M500($34M–M$37M+M$.28)M=M–$1,360
CapitalMgainsMyieldM M $34M – –M.0811,M orM –M8.11%
$37M/M$37M 
M


DividendMyiel M $.28M/M$3 M .0076,M orM.76%
d 7
TotalMrateMofMreturnM=M–8.11%M+M.76%M=M–7.35%

4.
a. averageMreturnM=M6.0%,MaverageMriskMpremiumM=M2.7%
b. averageMreturnM=M3.3%,MaverageMriskMpremiumM=M0%
c. averageMreturnM=M12.3%,MaverageMriskMpremiumM=M9.0%
d. averageMreturnM=M16.3%,MaverageMriskMpremiumM=M13.0%

5. CherryMaverageMreturnM 17% M 11%M – M 3 M 14%M/M M 8.60%
 M 2% % 5
StrawMaverageMreturnM 16% M 18%M – M 1%M 22%M/M M 10.20%
 M 6%  5

6. Cherry:MRAM 

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, 8.60%
.17MM –MM.086  MMM
Var MM1M/M42MMM
2MM
2M .11MM–MM .086  MMM –.02MM –MM.086 
2MM
MMM .03MM –
2MM
M .00623
MM .086  MMM.14MM –MM.086  
 
.00623
1/ 2MM
StandardMdeviationM .0789,M orM7.89%
 

Straw:MRBM 10.20%





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