Solution Manual-Investment
Part B
END-OF-CHAPTER
SOLUTIONS
Fundamentals of Investments, 5th edition
Jordan and Miller
Chapter 1
A Brief History of Risk and Return
Concept Questions
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return.
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the dividend yield must be four percent.
3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –100 percent; if returns were truly normally distributed, you could lose much more.
4. To calculate an arithmetic return, you simply sum the returns and divide by the number of returns. As such, arithmetic returns do not account for the effects of compounding. Geometric returns do account for the effects of compounding. As an investor, the more important return of an asset is the geometric return.
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to approximate a holding period return. When predicting a holding period return, the arithmetic return will tend to be too high and the geometric return will tend to be too low. Blume’s formula statistically adjusts these returns for different holding period expected returns.
6. T-bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in our chapter on interest rates, rates on T-bills will almost always be slightly higher than the rate of inflation.
7. Risk premiums are about the same whether or not we account for inflation. The reason is that risk premiums are the difference between two returns, so inflation essentially nets out.
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are smaller than pretax returns.
9. We have seen that T-bills
END-OF-CHAPTER
SOLUTIONS
Fundamentals of Investments, 5th edition
Jordan and Miller
Chapter 1
A Brief History of Risk and Return
Concept Questions
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return.
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the dividend yield must be four percent.
3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on the lower tail at –100 percent; if returns were truly normally distributed, you could lose much more.
4. To calculate an arithmetic return, you simply sum the returns and divide by the number of returns. As such, arithmetic returns do not account for the effects of compounding. Geometric returns do account for the effects of compounding. As an investor, the more important return of an asset is the geometric return.
5. Blume’s formula uses the arithmetic and geometric returns along with the number of observations to approximate a holding period return. When predicting a holding period return, the arithmetic return will tend to be too high and the geometric return will tend to be too low. Blume’s formula statistically adjusts these returns for different holding period expected returns.
6. T-bill rates were highest in the early eighties since inflation at the time was relatively high. As we discuss in our chapter on interest rates, rates on T-bills will almost always be slightly higher than the rate of inflation.
7. Risk premiums are about the same whether or not we account for inflation. The reason is that risk premiums are the difference between two returns, so inflation essentially nets out.
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax returns are smaller than pretax returns.
9. We have seen that T-bills