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Finance Homework Introduction to Finance

Week 7 Melicher / Norton

14th Edition / 2011

Chapter 12: P1, P2, P3, and P4

P1. From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset.

ASSET ANNUAL RETURNS

A) 5%, 10%, 15%, 4%

B) -6%, 20%, 2%, -5%, 10%

C) 12%, 15%, 17%

D) 10%, -10%, 20%, -15%, 8%, -7%

P2. Base upon your answers to question 1, which asset appears riskiest based on standard deviation? Based on coefficient of variation?

P3. Recalling the definitions of risk premiums from Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate, what is the risk premium from investing in each of the other asset classes listed in Table 12.4?

Table 12.4 - Historical Returns and Standard Deviation of Returns from Different Assets, 1928-2008:

Annual Average Return - Treasury Bills (3.8%), Treasury Bonds (5.4%), Stocks (11.1%), Inflation Rate (3.2%)

Standard Deviation - Treasury Bills (3.0%), Treasury Bonds (7.6%), Stocks (20.4%), Inflation Rate (4.0%)

P4. What is the real, or after-inflation, return from each of the asset classes listed in Table 12.4?

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P1. From xxx xxxxxxxxxxx below, xxxxxxx xxx average annual return, the variance, standard xxxxxxxxxx xxx coefficient of xxxxxxxxx xxx xxxx xxxxxxxxxxxx ANNUAL RETURNS A) 5%, xxxx xxxx xxxxx -6%, xxxx xxx -5%, 10% C) xxxx 15%, xxxxxx 10%, xxxxx xxxx -15%, 8%, xxx

xxxxxxxxxxxxxA | B | C | D | |

xxxxxxx annual xxxxxx | 8.5% | xxxx | xxxxx | xx |

variance | xxxxx | 119.2 | xxxx | 186.4 |

SD | 5.07 | 10.92 | xxxx | 13.65 |

xx | xxxxxx | xxxx | xxxxxx | xxxxx |

P2. Base upon xxxx xxxxxxx xx question xx which xxxxx xxxxxxx xxxxxxxx based on standard deviation? Based xx xxxxxxxxxxx xx variation?

It xx known that x xxxxxxxx xxxxx xxxx have a high xxxxxxxx deviation xxxxx the xxxxxxxxx xx x stable blue chip xxxxx xxxx xx lower. xxxxx xx this, xxxxx x xx xxx most xxxxxxxx or xxxxxxxx xxx xxxxx x

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# xxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxInvestments | ||||

A | B | x | x | |

xxxxxx Return | 5% | -6% | 12% | 10% |

10% | xxx | xxx | -10% | |

xxx | xx | 17% | xxx | |

4% | xxx | -15% | ||

10% | 8% | |||

-7% | ||||

xxxxxxx xxxxxx return | 8.50% | xxxxx | 14.67% | 1.00% |

xxxxxxxx | xxxxx | xxxxx | 0.06% | 1.86% |

xxxxxxxx deviation | xxxxx | xxxxxx | 2.52% | xxxxxx |

xxxxxxxxxxx of variation | 59.60% | 259.95% | xxxxxx | xxxxxxxx |

xxxxx on statndard deviation, xxxxxxxxxx that has xxxxx standard xxxxxxxxx xx xxxxx xxxxxxx xxxx investment with highter xxxxxxxx deviation. Accordingly, investment C xx the xxxxx xxxxx and xxxxxxxxxxx x xx the most risky. | ||||

Based on coefficient of variation, investment x xx still least xxxxx than all xxxxx xxxxxxxxxxx and xxxxxxxxxx x xx xxx most xxxxxx xxxxx all the investments xxxx xxxxxxxxx expected xxxxxxx coefficient xx xxxxxxxx xxxxxxxx risk xx x xxxxxx xxx as it also considers xxxx of the expected return. |

# xxxxxx

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