## finance-To complete the homework assignments in the templates provided

Instructions

NAME:

To complete the homework

assignments in the templates provided:

1.

The

question is provided for each problem. You may need to refer to your textbook

for additional information in a few cases.

2.

You will enter the required information into the

shaded cells.

3.

The cells are coded:

a) T requires a text answer.Essay

questions require references; use the

textbook.

b) C requires a calculation,using Excel formulas or functions. You cannot perform the

operation on a calculator and then type the answer in the cell.You will enter the calculation in the cell, and only the final

answer will show in the cell. I will be able to review your calculation and

correct, if necessary.

c) F

requires a number only. In some problems, a âStep 1â is added to help you

solve the problem.

d) Formula requires a written formula,

not the numbers. For example, the rate of return = [(1 + nominal)/

(1+inflation)]-1, or D (debt) + E (equity) = V (value).

4.

Name your

assignment file as “lastnamefirstinitial-FINC600-Week#”, and submit by midnight ET, Day 7.

Problem 7-2

The following table shows the nominal returns on

U.S. Stocks and the rate of inflation:

Year

Nominal Return

(%)

Inflation (%)

2004

12.5

3.3

2005

6.4

3.4

2006

15.8

2.5

2007

5.6

4.1

2008

-37.2

0.1

a)

What was the standard deviation of the market

returns?

b)

Calculate the average real return.

Answers:

a)

What was the standard deviation of the market

returns?

Find the standard

deviation by completing the table with the appropriate formulas

Year

Nominal Return

(%)

Difference from

Average

Squared

Difference

TIP:

Click on the cell for directions

2004

12.5

C

C

2005

6.4

C

C

2006

15.8

C

C

2007

5.6

C

C

2008

-37.2

C

C

Total 2004-2008

C

C

Average

C

C

Std. Deviation

C

Use SQRT function for

this answer only

b) Calculate the average real return.

Find the average real

return by completing the table with the appropriate formulas

Year

Nominal Return

(%)

Inflation (%)

Real Return (%)

TIP:

Click on the cell for directions

2004

12.5

3.3

C

2005

6.4

3.4

C

2006

15.8

2.5

C

2007

5.6

4.1

C

2008

-37.2

0.1

C

Average

C

Problem 7-11

Each of the following statements

is dangerous or misleading. Explain why.

a. A long-term United States government bond is always absolutely safe.

b. All investors should prefer stocks to bonds because stocks offer higher

long-run rates of return.

c. The best practical forecast of future rates of return on the stock

market is a 5- or 10-year average of historical returns.

Answers:

a.

T

b.

T

c.

T

Problem

8-6

Suppose that the Treasury bill rate were 6% rather

than 4%. Assume that the expected return on the market stays at 10%. Use the

betas in Table 8.2 (p. 193) – also provided below.

a.

Calculate the expected return from Dell.

b. Find the highest expected return that is offered by one of these

stocks.

c. Find the lowest expected return that is offered by one of these

stocks.

d. Would Ford offer a higher or lower expected return if the interest rate

were 6% rather than 4%? Assume that the expected market return stays at

10%.

e. Would Exxon Mobil offer a higher or lower expected return if the

interest rate were 8%?

Answers:

Formula

Calculation

A. Dell’s expected

return

Rf + (Beta (Rm – Rf))

C

B./C.

Stock

Beta (B)

Revised T Bill Risk-Free Rate

Market Return

Expected return

Amazon

2.16

F

F

C

Ford

1.75

F

F

C

Dell

1.41

F

F

C

Starbucks

1.16

F

F

C

Boeing

1.14

F

F

C

Disney

0.96

F

F

C

Newmont

0.63

F

F

C

Exxon Mobil

0.55

F

F

C

Johnson &

Johnson

0.5

F

F

C

Campbell Soup

0.3

F

F

C

B. Highest

T

C. Lowest

T

D. FORD will offer a ________expected return at 6%.

Higher or lower?

Interest rate

4%

6%

Rate of

return

C

C

E. Exxon

will offer a _______ expected return at 8%.

Higher or lower?

Problem 8-18

Some true or false questions

about the APT:

a. The APT factors cannot reflect diversifiable risks.

b. The market rate of return cannot be an APT factor.

c. There is no theory that specifically identifies the APT factors.

d. The APT model could be true but not very useful, for example, if

the relevant factors change unpredictably.

Respond to each question – true or false – and

why.

Answer:

T/F

a.

WHY?

b.

WHY?

c.

WHY?

d.

WHY?

Interest rate

4%

8%

Rate of

return

C

C

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