## 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     \$ 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   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., & McLeavey, D. W. (2013).Quantitative investment analysis. Hoboken, N.J: Wiley.