Solution Manual for Fundamentals of Investments Valuation and Management, 10th Edition by Bradford Jordan and Thomas Miller and Steve Dolvin

Solution Manualfor Fundamentalsof Investments Valuation an X X X X X X X




d Management, 10th Edition by Bradford Jordan and
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ThomasMiller and SteveDolvin X X X X




SOLUTION MANUAL FOR X X




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




Chapter 1-21 X




Chapter 1 X




A Brief History of Risk and Return
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Concept Questions X




1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the hi
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gher is its expected return.X X X X




2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the di
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vidend yield must be four percent. X X X X X




3. It is impossible to lose more than –
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100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –
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100 percent; if returns were truly normally distributed, you could lose much more.
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4. To calculate an arithmetic return, you sum the returns and divide by the number of returns. As such, arithm
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etic returns do not account for the effects of compounding (and, in particular, the effect of volatility). Geo
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metric returns do account for the effects of compounding and for changes in the base used for each year’s c
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alculation of returns. As an investor, the more important return of an asset is the geometric return.
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5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to appr
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oximate a holding period return. When predicting a holding period return, the arithmetic return will tend to
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be too high and the geometric return will tend to be too low. Blume’s formula adjusts these returns for differ
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ent holding period expected returns.
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6. T-
bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in o
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ur chapter on interest rates, rates on T-
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bills will almost always be slightly higher than the expected rate of inflation.
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7. Risk premiums are about the same regardless of whether we account for inflation. The reason is that risk pr
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emiums are the difference between two returns, so inflation essentially nets out.
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8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are s
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maller than pretax returns. X X X




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,Solution Manualfor Fundamentalsof Investments Valuation an X X X X X X X




d Management, 10th Edition by Bradford Jordan and
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ThomasMiller and SteveDolvin X X X X




9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in T-
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bills actually lost ground (assuming anything other than a very low tax rate). Thus, an all T-
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bill strategy will probably lose money in real dollars for a taxable investor.
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10. It is important not to lose sight of the fact that the results we have discussed cover over 80 years, well beyon
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d the investing lifetime for most of us. There have been extended periods during which small stocks have d
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one terribly. Thus, one reason most investors will choose not to pursue a 100 percent stock (particularly sm
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all-
cap stocks) strategy is that many investors have relatively short horizons, and high volatility investments m
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ay be very inappropriate in such cases. There are other reasons, but we will defer discussion of these to late
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r chapters. X




11.

Solutions to Questions and Problems X X X X




NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due t
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o space and readability constraints, when these intermediate steps are included in this solutions manual, roundi
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ng may appear to have occurred. However, the final answer for each problem is found without rounding during
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any step in the problem.
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Core Questions
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1. Total dollar return = 100($41 – $37 + $.28) = $428.00
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Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what it
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would bring if you sold it. Whether you choose to do so or not is irrelevant (ignoring commissions and tax
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es).


2. Capital gains yield X X X X X $41 – $37 / $37 .1081, or 10.81% Dividend yield $.28/$37 .0076, or .76%
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Total rate of return 10.81% .76% 11.57%
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3. Dollar return = 500($34 – $37 + $.28) = –$1,360
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Capital gains yield $34 – $37 /$37 –.0811, or –8.11%
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Dividend yield $.28/$37 .0076, or .76% Total rate of return = – X X X X X X X X X




X 8.11% + .76% = –7.35% X X X X




4.
a. average return = 6.0%, average risk premium = 2.7% X X X X X X X X




b. average return = 3.3%, average risk premium = 0% X X X X X X X X




c. average return = 12.3%, average risk premium = 9.0% X X X X X X X X




d. average return = 16.3%, average risk premium = 13.0%X X X X X X X X




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,Solution Manualfor Fundamentalsof Investments Valuation an X X X X X X X




d Management, 10th Edition by Bradford Jordan and
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ThomasMiller and SteveDolvin X X X X




5. Cherry average return X X 17% 11% – 2% X X 3% 14% /5 X X 8.60% Straw average return
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16% 18% – 6% X X 1% 22% /5 X X 10.20%

6. Cherry: RA X 8.60%

Var 1/ 4 X .17 – .086 X X X X
2
.11 – .086 X X X X
2
–.02 – .086 X X X X
2
.03 – .086
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2
.14 – .086
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2
.0062


1/2
Standard deviation X .00623 X X .0789, or 7.89% X X




Straw: RB X 10.20%
Var 1/ 4 X .16 – .102 X X
2
.18 – .102 X X X X
2
–.06 – .102 X X X X
2
.01 – .102 X X X X
2
.22 – .102 X X X X
2



.01452 X




1/2
Standard deviation X .01452 X X .1205, or 12.05% X X




7. The capital gains yield is
X X X X $59 – $65 /$65 X X X –.0923, or – X X




9.23% (notice the negative sign). With a dividend yield of 1.2 percent, the total return is –8.03%.
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8. Geometric return X 1 .17 1 .11 1 .02 1 .03 1 .14 (1/5) X
–1 X .0837,
or 8.37%
X




9. Arithmetic return X .21 .12 .07 –.13 – .04 X X X . X X X .0817, or 8.17% X X




(1/6)

Geometric return X 1 .21 1 .12 1 .07 1 – .13
X X 1 – .04
X X 1 .26 – 1
X X




.0730, or 7.30% X X




Intermediate Questions X




10. That’s plus or minus one standard deviation, so about two-
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thirds of the time, or two years out of three. In one year out of three, you will be outside this range, implying that
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you will be below it one year out of six and above it one year out of six.
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, Solution Manualfor Fundamentalsof Investments Valuation an X X X X X X X




d Management, 10th Edition by Bradford Jordan and
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ThomasMiller and SteveDolvin X X X X




11. You lose money if you have a negative return. With a 12 percent expected return and a 6 percent standard deviat
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ion, a zero return is two standard deviations below the average. The odds of being outside (above or below) two
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standard deviations are 5 percent; the odds of being below are half that, or 2.5 percent. (It’s actually 2.28 percen
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t.) You should expect to lose money only 2.5 years out of every 100. It’s a pretty safe investment.
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12. The average return is 6.0 percent, with a standard deviation of 9.8 percent, so Prob(Return < –
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3.8 or Return 15.8 )
X X X X 1/3, but we are only interested in one tail; Prob
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Return –3.9 1/ 6 X




, which is half of 1/3 (or about 16%) .
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95%: 6.0 ± 2σ = 6.0 ± 2(9.8) = –13.6% to 25.6%
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99%: 6.0 ± 3σ = 6.0 ± 3(9.8) = –23.4% to 35.4%
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13. Expected return = 16.4%; σ = 31.2%. Doubling your money is a 100% return, so if the return distribution
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is normal, Z 100 – 16..2 2.68 standard deviations; this is in-
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between two and three standard deviations, so the probability is small, somewhere between .5% and 2.5% (wh
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y?). Referring to the nearest Z table, the actual probability is = 0.369%, or less than every 100 years. Tripling yo
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ur money would be Z
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200 – X




16..2 5.88 standard deviations; this corresponds to a probability of (much) less than 0.01%. (The actual a
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nswer is less than once every 1 million years, so don’t hold your breath.)
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14.
Year Common stocks T-bill return Risk premium X X X




1973 –14.69% 7.29% –21.98%
1974 –26.47% 7.99% –34.46%
1975 37.23% 5.87% 31.36%
1796 23.93% 5.07% 18.86%
1977 –7.16% 5.45% –12.61%
sum 12.84% 31.67% –18.83%
a. Annual risk premium = Common stock return – T-bill return (see table above).
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b. Average returns: Common stocks X X X 12.84/5 .0257, or 2.57%; T-bills X X X 31.67/5
.0633 , or 6.33% Risk premium X X X X X –18.83/5 –.0377, or –3.77% X X




c. Common stocks: Var X X 1/ 4[ X –.1469 – .0257 X X X X
2
–.2647 – .0257 X X X X
2
.3723 – .0257 X X
2




.2393 X – .0257 X X X
2
–.0716 – .0257 X X X X
2 X
] .072337

1/2
Standard deviation X 0.072337 X X .2690, or 26.90% X X




T-bills: Var X 1/ 4 X .0729 – .0633 X X X X
2
.0799 – .0633 X X X X
2
.0587 – .0633 X X X X
2
.0507 –.0633 X




.0545 – .0633 X X




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