Solution manual for fundamentals of investments valuation and management 9th edition by Bradford D. Jordan and Thomas Miller All Chapters 1-21 Covered

Solution manual
fundamentals of investments valuation and management
9th edition by Bradford D. Jordan and Thomas Miller
All Chapters 1-21 Covered

,Fundamentals of Investments Valuation and Management 9th Edition By Jordan
E E E E E E E E E




Chapter 1-21
E




Chapter 1 E


A Brief History of Risk and Return
E E E E E E




ConceptEQuestions

1. ForEbothEriskEandEreturn,EincreasingEorderEisEb,Ec,Ea,Ed.EOnEaverage,EtheEhigherEtheEriskEofEanEinvestme
nt,EtheEhigherEisEitsEexpectedEreturn.

2. SinceEtheEpriceEdidn’tEchange,EtheEcapitalEgainsEyieldEwasEzero.E IfEtheEtotalEreturnEwasEfourEpercent,Et
henEtheEdividendEyieldEmustEbeEfourEpercent.

3. ItEisEimpossibleEtoEloseEmoreEthanE–
100EpercentEofEyourEinvestment.ETherefore,EreturnEdistributionsE areEcutEoffEonEtheElowerEtailEatE–
100Epercent;EifEreturnsEwereEtrulyEnormallyEdistributed,EyouEcouldEloseEmuchEmore.

4. ToEcalculateEanEarithmeticEreturn,EyouEsumEtheEreturnsEandEdivideEbyEtheEnumberEofEreturns.EAsEsuch,
EarithmeticEreturnsEdoEnotEaccountEforEtheEeffectsEofEcompoundingE(and,EinEparticular,EtheEeffectEofEv

olatility).EGeometricEreturnsEdoEaccountEforEtheEeffectsEofEcompoundingEandEforEchangesEinEtheEbaseE
usedEforEeachEyear’sEcalculationEofEreturns.EAsEanEinvestor,EtheEmoreEimportantEreturnEofEanEassetEisE
theEgeometricEreturn.

5. Blume’sEformulaEusesEtheEarithmeticEandEgeometricEreturnsEalongEwithEtheEnumberEofEobservationsEt
oEapproximateEaEholdingEperiodEreturn.EWhenEpredictingEaEholdingEperiodEreturn,EtheEarithmeticEretur
nEwillEtendEtoEbeEtooEhighEandEtheEgeometricEreturnEwillEtendEtoEbeEtooElow.EBlume’sEformulaEadjustsE
theseEreturnsEforEdifferentEholdingEperiodEexpectedEreturns.

6. T-
billEratesEwereEhighestEinEtheEearlyEeightiesEsinceEinflationEatEtheEtimeEwasErelativelyEhigh.EAsEweEdisc
ussEinEourEchapterEonEinterestErates,EratesEonET-
billsEwillEalmostEalwaysEbeEslightlyEhigherEthanEtheEexpectedErateEofEinflation.

7. RiskEpremiumsEareEaboutEtheEsameEregardlessEofEwhetherEweEaccountEforEinflation.ETheEreasonEisEtha
tEriskEpremiumsEareEtheEdifferenceEbetweenEtwoEreturns,EsoEinflationEessentiallyEnetsEout.

,8. Returns,EriskEpremiums,EandEvolatilityEwouldEallEbeElowerEthanEweEestimatedEbecauseEaftertaxEreturn
sEareEsmallerEthanEpretaxEreturns.

9. WeEhaveEseenEthatET-billsEbarelyEkeptEupEwithEinflationEbeforeEtaxes.EAfterEtaxes,EinvestorsEinET-
billsEactuallyElostEgroundE(assumingEanythingEotherEthanEaEveryElowEtaxErate).EThus,EanEallET-
billEstrategyEwillEprobablyEloseEmoneyEinErealEdollarsEforEaEtaxableEinvestor.

, 10. ItEisEimportantEnotEtoEloseEsightEofEtheEfactEthatEtheEresultsEweEhaveEdiscussedEcoverEoverE80Eyears,E
wellEbeyondEtheEinvestingElifetimeEforEmostEofEus.EThereEhaveEbeenEextendedEperiodsEduringEwhichEs
mallEstocksEhaveEdoneEterribly.EThus,EoneEreasonEmostEinvestorsEwillEchooseEnotEtoEpursueEaE100Epe
rcentEstockE(particularlyEsmall-
capEstocks)EstrategyEisEthatEmanyEinvestorsEhaveErelativelyEshortEhorizons,EandEhighEvolatilityEinvestm
entsEmayEbeEveryEinappropriateEinEsuchEcases.EThereEareEotherEreasons,EbutEweEwillEdeferEdiscussion
EofEtheseEtoElaterEchapters.




SolutionsEtoEQuestionsEandEProblems

NOTE:EAllEendEofEchapterEproblemsEwereEsolvedEusingEaEspreadsheet.EManyEproblemsErequireEmultipleEst
eps.EDueEtoEspaceEandEreadabilityEconstraints,EwhenEtheseEintermediateEstepsEareEincludedEinEthisEsolutio
nsEmanual,EroundingEmayEappearEtoEhaveEoccurred.EHowever,EtheEfinalEanswerEforEeachEproblemEisEfoundE
withoutEroundingEduringEanyEstepEinEtheEproblem.

CoreEQuestions

1. TotalEdollarEreturnE=E100($41E–E$37E+E$.28)E=E$428.00
WhetherEyouEchooseEtoEsellEtheEstockEdoesEnotEaffectEtheEgainEorElossEforEtheEyear;EyourEstockEisEwort
hEwhatEitEwouldEbringEifEyouEsoldEit.EWhetherEyouEchooseEtoEdoEsoEorEnotEisEirrelevantE(ignoringEcommi
ssionsEandEtaxes).

2. CapitalEgainsEyieldE=E($41E–
E$37)/$37E=E.1081,EorE10.81%EDividendEyieldE=E$.28/$37E

=E.0076,EorE.76%
TotalErateEofEreturnE=E10.81%E+E.76%E=E11.57%

3. DollarEreturnE=E500($34E–E$37E+E$.28)E=E–$1,360
CapitalEgainsEyieldE=E($34E–E$37)/$37E=E–.0811,EorE–
8.11%EDividendEyieldE=E$.28/$37E=E.0076,EorE.76%
TotalErateEofEreturnE=E–8.11%E+E.76%E=E–7.35%

4. a.E averageEreturnE=E6.2%,EaverageEriskEpremiumE=E2.6%
b. averageEreturnE=E3.6%,EaverageEriskEpremiumE=E0%
c. averageEreturnE=E11.9%,EaverageEriskEpremiumE=E8.3%
d. averageEreturnE=E17.5%,EaverageEriskEpremiumE=E13.9%

5. CherryEaverageEreturnE=E(17%E+E11%E–E2%E+E3%E+E14%)/5E=E8.60%
StrawEaverageEreturnE=E(16%E+E18%E–E6%E+E1%E+E22%)/5E=E10.20%

6. Cherry:ERAE=E8.60%
VarE=E1/4[(.17E–E.086)2E+E(.11E–E.086)2E+E(–.02E–E.086)2E+E(.03E–E.086)2E+E(.14E–E.086)2]E=E.00623
StandardEdeviationE=E(.00623)1/2E=E.0789,EorE7.89%

Straw:ERBE=E10.20%
VarE=E1/4[(.16E–E.102)2E+E(.18E–E.102)2E+E(–.06E–E.102)2E+E(.01E–E.102)2E+E(.22E–E.102)2]E=E.01452
StandardEdeviationE=E(.01452)1/2E=E.1205,EorE12.05%