Chapter 12

1. Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share
during the year, and had an ending share price of $102. Compute the percentage total
return.

2. In Problem 1, what was the dividend yield The capital gains yield?

3. Rework Problems 1 and 2 assuming the ending share price is $83.

7. Using the following returns, calculate the arithmetic average returns, the variances, and
the standard deviations for X and Y.

8. Refer to Table 12.1 in the text (extracted below) and look at the period from 1970
through 1975.

a. Calculate the arithmetic average returns for large-company stocks and T-bills over this
period.s

b. Calculate the standard deviation of the returns for large-company stocks and T-ills over
this period.

c. Calculate the observed risk premium in each year for the large-company stocks versus the
T-bills. What was the average risk premium over this period? What was the standard
deviation of the risk premium over this period?

d. Is it possible or the risk premium to be negative before an investment is undertaken? Can

the risk premium be negative after the fact? Explain.

Year Large-Company Long-Term US Treasury Bill Consumer Price

Stocks Government Index
Bonds
1970 3.94 18.92 6.50 5.57
1971 14.30 11.24 4.36 3.27
1972 18.99 2.39 4.23 3.27
1973 -14.69 3.30 7.29 8.71
1974 -26.47 4.00 7.99 12.34
1975 37.23 5.52 5.87 6.94

9. You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past
five years: 7%, -12%, 11%, 38%, and 14%.

a. What was the arithmetic average return on Crash-n-Burn’s stock over this five-year period?

b. What was the variance of Crash-n-Burn’s returns over this period? The standard deviation?

14. You find a certain stock that had returns of 7%, -12%, 18% and 19% for four of the last
five years. If the average return of the stock over this period was 10.5%, what was the
stock’s return for the missing year? What is the standard deviation of the stock’s return?
15. A stock has had returns of 3%, 38%, 21%, -15%, 29%, and -13% over the last six
years. What are the arithmetic and geometric returns for the stock?

16. A stock has had the following year-end prices and dividends:

Year Price Dividend

1 $60.18 -
2 73.66 $0.60
3 94.18 0.64
4 89.35 0.72
5 78.49 0.80
6 95.05 1.20

What are the arithmetic and geometric returns for the stock?

17. Suppose the returns on long-term corporate bonds are normally distributed. Based on
the historical record, what is the approximate probability that your return on these bonds
will be less than -2.2% in a given year? What range of returns would you expect to see 95%
of the time? What range would you expect to see 99% of the time?

20. Over a 40 year period an asset had an arithmetic return of 15.3% and a geometric
return of 11.9%. Using Blume’s formula, what is your best estimate of the future annual
returns over 5 years? 10 years? 20 years?

21. Assume that the historical return on large-company stocks is a predictor of the future
returns. What return would you estimate for large-company stock over the year? The next 5
years? 20 years? 30 years?