Question

6. Using the data in the table to the​ right, calculate the return for investing in the stock from January 1 to December 31. Prices are after the dividend has been paid.

Date	Price	Dividend
1/2/03	$32.64	-
2/5/03	$31.49	$0.22
5/14/03	$30.76	$0.18
8/13/03	$32.66	$0.22
11/12/03	$38.52	$0.19
1/2/04	$43.88	-

Return for the entire period is __

​(Round to two decimal​ places.)

7. You observe a portfolio for five years and determine that its average return is 12.7​% and the standard deviation of its returns in 19.9​%. Would a​ 30% loss next year be outside the​ 95% confidence interval for this​ portfolio?

The low end of the​ 95% prediction interval is ___%

​(Enter your response as a percent rounded to one decimal​ place.)

A.​No, you cannot be confident that the portfolio will not lose more than​ 30% of its value next year. This is because the low end of the prediction interval is less than −​30%.

B.​Yes, you can be confident that the portfolio will not lose more than​ 30% of its value next year. This is because the low end of the prediction interval is less than −​30%.

C.​Yes, you can be confident that the portfolio will not lose more than​ 30% of its value next year. This is because the low end of the prediction interval is greater than −​30%.

D.​No, you cannot be confident that the portfolio will not lose more than​ 30% of its value next year. This is because the low end of the prediction interval is greater than −​30%.

8. Consider two local banks. Bank A has 84 loans​ outstanding, each for​ $1.0 million, that it expects will be repaid today. Each loan has a 6% probability of​ default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $84 million​ outstanding, which it also expects will be repaid today. It also has a 6% probability of not being repaid. Calculate the​ following:

a. The expected overall payoff of each bank.

b. The standard deviation of the overall payoff of each bank.

9. You are a​ risk-averse investor who is considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first​ economy, all stocks move together—in good times all prices rise​ together, and in bad times they all fall together. In the second​ economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Which economy would you choose to invest​ in? Explain.

​(Select the best choice​ below.)

A. A risk averse investor would prefer the economy in which stock returns are independent because by combining the stocks into a portfolio he or she can get a higher expected return than in the economy in which all stocks move together.

B. A risk averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio.

C. A risk averse investor would choose the economy in which stocks move together because the uncertainty is much more​ predictable, and you have to predict only one thing.

D. A risk averse investor is indifferent in both cases because he or she faces unpredictable risk.

Answer 1

6]

return for entire period = (price at end of year - price at beginning of year + total dividends during year) / price at beginning of year

return for entire period = ($43.88 - $32.64 + ($0.22 + $0.18 + $0.22 + $0.19)) / $32.64

return for entire period = 36.92%