Corp Investment Analysis Chapter 1







5.a.                
  Stock T Stock B  
  Year Return Return – AM (Return – AM)^2 Return Return – AM (Return – AM)^2  
  1 0.19 0.136 0.018496 0.08 0.136 0.136  
  2 0.08 0.026 0.05400000000000001 0.03 0.05400000000000001 0.05400000000000001  
  3 -0.12 -0.174 0.05400000000000001 -0.09 0.05400000000000001 0.05400000000000001  
  4 -0.03 -0.08400000000000001 0.05400000000000001 0.02 0.05400000000000001 0.05400000000000001  
  5 0.15 0.09599999999999999 0.05400000000000001 0.04 0.05400000000000001 0.05400000000000001  
  Sum 0.27 0.018496 0.018496 0.018496  
a. AM 0.05400000000000001 0.018496  
b. SD 0.1282 0.0092  
c. CV 2.37 0.05  
d. GM 0.04757371465938132 0.018496  
                 
  Stock T is desirable as per AM              
  Stock B is preferable as per SD              
  Stock T is desirable as per CV              
  Stock T has more variability than Stock B. Greater the variability of returns, greater the difference in arithmetic an geometric mean              
                 
7 Possible Rate of Return Probability          
  -0.60 0.05          
  -0.30 0.2          
  -0.10 0.1          
  0.20 0.3          
  0.40 0.2          
  0.80 0.15          
                 
  Expected Return   0.1600          
                 
  Expected return [E(Ri)] on Lauren Computer stock is 16%              
                 
                 
9 U.S. government T-bills     5.50%        
  U.S. government long-term bonds     7.50%        
  U.S. common stocks     11.60%        
                 
  Inflation rate = (172 – 160)/160              
  Inflation rate   7.50%          
                 
  Real U.S. T-Bill Rate   -1.86%          
  Real U.S. L.T. Bond Rate   0.00%          
  Real U.S. Stock Return   3.81%          
                 
                 
12 Nominal Rate on T-bills = (1+0.03)*(1+0.05)-1              
      8.15%          
                 
  Risk premium = Stock Return – Nominal T-Bill Rate              
    5.85%            
                 
  Alternatively, the risk premium can also be calculated as:              
  Formula: (1+Stock Return)/(q1+Nominal T-Bill Rate)-1 or (1.14)/(1.0815)-1              
  5.41%