# FINC 600 Week3 Assignment 36090

| November 13, 2015

QuestionInstructions

NAME:

To complete the homework assignments in the templates provided:

1. The question is provided for each problem. You may need to refer to your textbook for additional information in

a few cases.

2. You will enter the required information into the shaded cells.

3. The cells are coded:

a) T requires a text answer. Essay questions require references; use the textbook.

b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator

and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show

in the cell. I will be able to review your calculation and correct, if necessary.

c) F requires a number only. In some problems, a Step 1 is added to help you solve the problem.

d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/

(1+inflation)]-1, or D (debt) + E (equity) = V (value).

4. Name your assignment file as &quot;lastnamefirstinitial-FINC600-Week#&quot;, and submit by midnight ET, Day 7.

Problem 7-2

The following table shows the nominal returns on U.S. Stocks and the rate of inflation:

Year

2004

2005

2006

2007

2008

Nominal Return

(%)

12.5

6.4

15.8

5.6

-37.2

Inflation (%)

3.3

3.4

2.5

4.1

0.1

a)What was the standard deviation of the market returns?

b)Calculate the average real return.

a)What was the standard deviation of the market returns?

Find the standard deviation by completing the table with the appropriate formulas

Year

2004

2005

2006

2007

2008

Total 2004-2008

Average

Std. Deviation

Nominal Return

(%)

12.5

6.4

15.8

5.6

-37.2

Difference from

Average

C

C

C

C

C

Squared

Difference

C

C

C

C

C

C

C

C

C

C

TIP: Click on the cell for

directions

Use SQRT function for this answer only

b)Calculate the average real return.

Find the average real return by completing the table with the appropriate formulas

Year

2004

2005

2006

2007

2008

Average

Nominal Return

(%)

12.5

6.4

15.8

5.6

-37.2

Inflation (%)

3.3

3.4

2.5

4.1

0.1

Real Return (%) TIP: Click on the cell for

directions

C

C

C

C

C

C

Problem 7-11

Each of the following statements is dangerous or misleading. Explain why.

a. A long-term United States government bond is always absolutely safe.

b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.

c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.

a.

T

b.

T

c.

T

Problem 8-6

Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at

10%. Use the betas in Table 8.2 (p. 193) – also provided below.

a. Calculate the expected return from Dell.

b. Find the highest expected return that is offered by one of these stocks.

c. Find the lowest expected return that is offered by one of these stocks.

d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the

expected market return stays at 10%.

e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?

Formula

Rf + (Beta (Rm – Rf))

A. Dell’s expected return

Calculation

C

B./C.

Stock

Beta (B)

Amazon

Ford

Dell

Starbucks

Boeing

Disney

Newmont

Exxon Mobil

Johnson &amp; Johnson

Campbell Soup

B. Highest

C. Lowest

2.16

1.75

1.41

1.16

1.14

0.96

0.63

0.55

0.5

0.3

Revised T Bill

Risk-Free Rate

Market

Return

Expected

return

D. FORD will offer a ________ expected return at 6%.

Interest rate

4%

6%

C

Rate of return

C

Higher or lower?

E. Exxon will offer a _______ expected return at 8%.

Interest rate

4%

8%

Rate of return

C

C

Higher or lower?

Principles of Corporate Finance, Concise, 2nd Edition

Problem 8-18

Some true or false questions about the APT:

a. The APT factors cannot reflect diversifiable risks.

b. The market rate of return cannot be an APT factor.

c. There is no theory that specifically identifies the APT factors.

could be true but not very useful, for example, if the relevant factors change unpredictably.

Respond to each question – true or false – and why.

T/F

a. WHY?

b. WHY?

c. WHY?

d. WHY?

d. The APT model

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