Financial Management

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FinancialManagement

Question 1 (a)

Average rate of return per year =

Total Stock price/ time

Time

Caswell

Average rate of return per year

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$

1

$ 9.00

0

2

$ 14.00

11.5

3

$ 10.00

11

4

$ 7.00

10

5

$ 9.00

9.8

Question 1 (b)

Arithmetic ARR =

(9+14+10+7+9)/5

$9.80

Question 1 (c)

Geometric Average rate of return =

((9*1)+(14*2)+(10*3)+(7*4)+(9*5))/(1+2+3+4+5)

$9.33

Question 1 (d)

The geometric average rate of return describes the annual rate of return earned over the period in a better way than the arithmetic mean. Concepts of mean are very important in investment (Runkle, DeFusco, Anson, Pinto and McLeavey, 2013)

Question 1 (e)

Rate of return =

current value – Original Value

Original value

(14-9)

9

55.56%

Question 2

A returns = (0.2*10%)+(0.6*16%)+(0.2*21%)

15.80%

A Std deviation = {(10% – 15.8%)^ 2(0.20) + (16% – 15.8%)^ 2 (0.60) + (21% – 15.8%)^ 2 (0.20)}^ ½

((-5.8%^2)*(0.20) + (0.2%^ 2)* (0.60) + (5.2%^ 2)* (0.20))^0.5

3.49%

B returns =(0.1*-7%)+(0.4*5%)+(0.4*13%)

6.50%

B Std deviation = {(-7% – 6.5%)^ 2(0.10) + (5% – 6.5%)^ 2 (0.40) + (13% – 6.5%)^ 2 (0.40)}^ ½

6.00%

When we consider rate of return, common stock A is better since it has a higher rate of return

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When we consider risk, common stock A is still better since it has a lower risk

Question 3

RR = (Dividend Received + (Closing price – purchase price)) / (purchase price)

(0 +(283.99-698.51))/698.51

-59.34%

Rate of return on stock is = (Closing price – purchase price) / purchase price

((283.99-698.51)/698.51

-59.34%

Question 4

RR = (Dividend Received + (Closing price – purchase price)) / (purchase price)

[(1.43 + (11.66 – $10.44)] / $10.44

25.38%

Rate of return on stock is = (Closing price – purchase price) / purchase price

(11.66 – 10.44)] / 10.44

11.69%

Reference

Runkle, D. E., DeFusco, R. A., Anson, M. J. P., Pinto, J. E., &amp McLeavey, D. W. (2013).Quantitative investment analysis. Hoboken, N.J: Wiley.

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