Question 1) The following are the returns for 1980 to 1986 on 5 types of capital-market instruments: common stocks, small-capitalization stocks, long-term corporate bonds, long-term U.S. government bonds, and U.S. Treasury Bills. You can use a spreadsheet program to make calculations.
|
Year
|
Common Stock
|
Small Stocks
|
Long-term
Corporate
Bonds
|
Long-term
Government
Bonds
|
U.S.
Treasury
Bills
|
|
|
1980
|
0.3242
|
0.3988
|
0.1124
|
|
|
-0.0262
|
-0.0395
|
|
|
1981
|
-0.0491
|
0.1471
|
|
|
0.1388
|
-0.0096
|
0.0185
|
|
|
1982
|
0.2141
|
0.2801
|
0.4379
|
0.4035
|
0.1054
|
|
|
1983
|
0.2251
|
0.3967
|
0.0470
|
|
|
0.0068
|
0.0880
|
|
|
1984
|
0.0627
|
-0.0667
|
0.0985
|
|
|
0.1639
|
0.1543
|
|
|
1985
|
0.3216
|
0.2466
|
0.3090
|
0.3097
|
0.0772
|
|
|
1986
|
0.1847
|
0.0685
|
0.1985
|
0.2444
|
0.0616
|
|
A. Calculate the average return for each type of security.
B. Calculate the variance for common stock based on the annual returns from question A
C. Calculate the holding period return for common stocks, corporate bonds, and US T-bills, given the annual returns from question A.
2) Four equally probable states of the economy may prevail next year. Below are the returns on the stocks of P & Q companies under each of the probable states. (For the purposes of this exercise, we assume that the economy definitely will fall within one of these four probable states.)
|
State of Economy
|
Probability
|
P Stock
|
Q Stock
|
|
Mild Recession
|
25.0%
|
4.00%
|
5.00%
|
|
Low Growth
|
25.0%
|
6.00%
|
7.00%
|
|
Moderate Growth
|
25.0%
|
9.00%
|
10.00%
|
|
Rapid Growth
|
25.0%
|
4.00%
|
14.00%
|
A. Given the equally probable 4 possible economic conditions, calculate the expected return for P stock and for Q stock.