Question

After graduating from college last spring with a major in ac- counting and finance, Jim Hale took a job as an analyst trainee for an investment company in Chicago. His first few weeks were filled with a series of rotations throughout the firm's vari- ous operating units, but this week he was assigned to one of the firm's traders as an analyst. On his first day, Jim's boss called him in and told him that he wanted to do some rudimentary analysis of the investment returns of a semiconductor manu- facturer called Advanced Micro Devices, Inc. (AMD). Specifi- cally, Jim was given the following month-end closing prices for the company spanning the period of November 1, 2011, through November 1, 2012:

Answer 1

1]

Realized return each month = (current month price - previous month price) / previous month price.

A B 1 Date Price Return % 2 01-Nov-11 $5.69 3 01-Dec-11 $5.40 -5.10% 4 01-Jan-12 $6.71 24.26% 5 01-Feb-12 $7.35 9.54% 6 01-Mar-12 $8.02 9.12% 7 01-Apr-12 $7.36 8.23% 8 01-May-12 $6.08 -17.39% 9 01-Jun-12 $5.73 -5.76% 10 01-Jul-12 $4.06 -29.14% 11 01-Aug-12 $3.72 -8.37% 12 01-Sep-12 $3.37 -9.41% 13 01-Oct-12 $2.05 -39.17% 14 01-Nov-12 $1.88 -8.29%

В C Return % Price 5.69 5.4 6.71 7.35 8.02 7.36 6.08 5.73 4.06 3.72 3.37 2.05 1.88 =(B3-B2)/B2 =(B4-B3)/B3 =(B5-B4)/B4 =(B6-B5)/B5 =(B7-B6)/B6 =(B8-B7)/B7 =(B9-B8)/B8 =(B10-B9)/B9 =(B11-B10)/10 =(B12-B11)/B11 =(B13-B12)/B12 =(B14-B13)/B13

2]

Arithmetic average is calculated using AVERAGE function in Excel.

Arithmetic average is -7.33%.

3 015 fx =AVERAGE(C3:C14) A B C 1 Date Price Return % 2 01-Nov-11 $5.69 01-Dec-11 $5.40 -5.10% 01-Jan-12 $6.71 24.26% 01-Feb-12 $7.35 9.54% 01-Mar-12 $8.02 9.12% 01-Apr-12 $7.36 -8.23% 01-May-12 $6.08 -17.39% 01-Jun-12 $5.73 -5.76% 01-Jul-12 $4.06 -29.14% 01-Aug-12 $3.72 -8.37% 12 01-Sep-12 $3.37 -9.41% 13 01-Oct-12 $2.05 -39.17% 14 01-Nov-12 $1.88 -8.29% 15 1 -7.33%

Geometric mean is calculate as below :

• To each monthly return, add 1.
• Compute the geometric mean of this series using GEOMEAN function in Excel.
• The GEOMEAN calculated is 0.9118.
• The geometric mean of the monthly returns = 0.9118 - 1 = -8.82%.

D 3 4 A B C 1 1 Date Price Return % 2 01-Nov-11 $5.69 01-Dec-11 $5.40 -5.10% 01-Jan-12 $6.71 24.26% 01-Feb-12 $7.35 9.54% 01-Mar-12 $8.02 9.12% 01-Apr-12 $7.36 -8.23% 01-May-12 $6.08 -17.39% 01-Jun-12 $5.73 -5.76% 01-Jul-12 $4.06 -29.14% 01-Aug-12 $3.72 -8.37% 12 01-Sep-12 $3.37 -9.41% 13 01-Oct-12 $2.05 -39.17% 14 01-Nov-12 $1.88 -8.29% 15 -7.33% 16 0.9490 1.2426 1.0954 1.0912 0.9177 0.8261 0.9424 0.7086 0.9163 0.9059 0.6083 0.9171 0.9118! -8.82%

Return % | AB 1 Date Price 240848 5.69 3 40878 5.4 4 40909 6.71 5 40940 7.35 6 40969 8.02 7 41000 7.36 8 41030 6.08 9 41061 5.73 10 41091 4.06 11 41122 3.72 12 41153 3.37 13 41183 2.05 14 41214 1.88 15 16 =(B3-B2)/B2 =1+C3 =(B4-B3)/B3 =1+04 = (B5-B4)/B4 1+C5 =(B6-B5)/B5 =1+C6 =(B7-B6)/B6 =1+C7 = (B8-B7)/B7 =1+C8 =(B9-B8)/B8 =1+C9 =(B10-B9)/B9 =1+C10 =(B11-B10)/B10 =1+C11 =(B12-B11)/B11 =1+C12 =(B13-B12)/B12 =1+C13 = (B14-B13)/B13 =1+C14 =AVERAGE(C3:C14) GEOMEAN(D3:D14) =D15-1

3]

year-end price = $5.69 * (1 + (-8.82%))¹²

year-end price = $1.88

4]

Ending price = beginning price * (1 + annual return)¹²

$5.69 = $1.88 * (1 + annual return)¹²

annual return = ($5.69 / $1.88)^1/12 - 1

annual return = 9.67%