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 “Step 1” 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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