Solution Manual for Fundamentals of Investments: Valuation and Management 10th Edition Jordan – Complete Answers (Chapters 1-21) & CFA Exam Review

SOLUTIONV MANUALV FOR
FundamentalsVofVInvestmentsVValuationVandVManagement,V10thVEditionVJordan
ChapterV1-21
ChapterV1
AVBriefVHistoryVofVRiskVandVReturn


ConceptVQuestions
1. ForVbothVriskVandVreturn,VincreasingVorderVisVb,Vc,Va,Vd.VOnVaverage,VtheVhigherVtheVriskVofV
anVinvestment,VtheVhigherVisVitsVexpectedVreturn.

2. SinceVtheVpriceVdidn’tVchange,VtheVcapitalVgainsVyieldVwasVzero.VIfVtheVtotalVreturnVwasVfour
Vpercent,VthenVtheVdividendVyieldVmustVbeVfourVpercent.


3. ItVisVimpossibleVtoVloseVmoreVthanV–
100VpercentVofVyourVinvestment.VTherefore,VreturnVdistributionsV areVcutVoffVonVtheVlowerVtail
VatV–100Vpercent;VifVreturnsVwereVtrulyVnormallyVdistributed,VyouVcouldVloseVmuchVmore.


4. ToVcalculateVanVarithmeticVreturn,VyouVsumVtheVreturnsVandVdivideVbyVtheVnumberVofVreturns.
VAsVsuch,VarithmeticVreturnsVdoVnotVaccountVforVtheVeffectsVofVcompoundingV(and,VinVparticul
ar,VtheVeffectVofVvolatility).VGeometricVreturnsVdoVaccountVforVtheVeffectsVofVcompoundingVan
dVforVchangesVinVtheVbaseVusedVforVeachVyear’sVcalculationVofVreturns.VAsVanVinvestor,VtheV
moreVimportantVreturnVofVanVassetVisV theVgeometricVreturn.

5. Blume’sVformulaVusesVtheVarithmeticVandVgeometricVreturnsValongVwithVtheVnumberVofVobserv
ationsVtoVapproximateVaVholdingVperiodVreturn.VWhenVpredictingVaVholdingVperiodVreturn,Vthe
VarithmeticVreturnVwillVtendVtoVbeVtooVhighVandVtheVgeometricVreturnVwillVtendVtoVbeVtooVlo
w.VBlume’sVformulaVadjustsVtheseVreturnsVforVdifferentVholdingVperiodVexpectedVreturns.

6. T-
billVratesVwereVhighestVinVtheVearlyVeightiesVsinceVinflationVatVtheVtimeVwasVrelativelyVhigh.V
AsVweVdiscussVinVourVchapterVonVinterestVrates,VratesVonVT-
billsVwillValmostValwaysVbeVslightlyVhigherVthanVtheVexpectedVrateVofVinflation.

7. RiskVpremiumsVareVaboutVtheVsameVregardlessVofVwhetherVweVaccountVforVinflation.VTheVreas
onVisVthatVriskVpremiumsVareVtheVdifferenceVbetweenVtwoVreturns,VsoVinflationVessentiallyVnets
Vout.


8. Returns,VriskVpremiums,VandVvolatilityVwouldVallVbeVlowerVthanVweVestimatedVbecauseVafterta
xVreturnsVareVsmallerVthanVpretaxVreturns.

9. WeVhaveVseenVthatVT-
billsVbarelyVkeptVupVwithVinflationVbeforeVtaxes.VAfterVtaxes,VinvestorsVinVT-
billsVactuallyVlostVgroundV(assumingVanythingVotherVthanVaVveryVlowVtaxVrate).VThus,VanVallV
T-billVstrategyVwillVprobablyVloseVmoneyVinVrealVdollarsVforVaVtaxableVinvestor.

10. ItVisVimportantVnotVtoVloseVsightVofVtheVfactVthatVtheVresultsVweVhaveVdiscussedVcoverVoverV8
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, 0Vyears,V wellVbeyondVtheVinvestingVlifetimeVforVmostVofVus.VThereVhaveVbeenVextendedVperio
dsVduringVwhichVsmallV stocksV haveV doneV terribly.V Thus,V oneV reasonV mostV investorsV willV c
hooseV notV toV pursueV aV 100




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, percentVstockV(particularlyVsmall-
capVstocks)VstrategyVisVthatVmanyVinvestorsVhaveVrelativelyVshortVhorizons,VandVhighVvolatility
VinvestmentsVmayVbeVveryVinappropriateVinVsuchVcases.VThereVareVotherVreasons,VbutVweVwill
VdeferVdiscussionVofVtheseVtoVlaterVchapters.


11.

SolutionsVtoVQuestionsVandVProblems

NOTE:VAllVendVofVchapterVproblemsVwereVsolvedVusingVaVspreadsheet.VManyVproblemsVrequireVmulti
pleVsteps.VDueVtoVspaceVandVreadabilityVconstraints,VwhenVtheseVintermediateVstepsVareVincludedVinVt
hisVsolutionsVmanual,VroundingVmayVappearVtoVhaveVoccurred.VHowever,VtheVfinalVanswerVforVeachV
problemVisVfoundVwithoutVroundingVduringVanyVstepVinVtheVproblem.

CoreVQuestions

1. TotalVdollarVreturnV=V100($41V–V$37V+V$.28)V=V$428.00
WhetherVyouVchooseVtoVsellVtheVstockVdoesVnotVaffectVtheVgainVorVlossVforVtheVyear;VyourVst
ockVisVworthVwhatVitVwouldVbringVifVyouVsoldVit.VWhetherVyouVchooseVtoVdoVsoVorVnotVisVir
relevantV(ignoringVcommissionsVandVtaxes).

2. CapitalVgainsVyield ($41V – =V .1081,V orV10.81%
V=
V $37)V/V$37

DividendVyiel =V $.28V/V$ =V .0076,V orV.76%
d 37
TotalVrateVofVretu =V 10.81 +V .76 =V 11.57%
rn % %
3. DollarVreturnV=V500($34V–V$37V+V$.28)V=V–$1,360
CapitalVgainsVyieldV =V ($34V – –V.0811,V orV –V8.11%
V $37)V/V$37V =
DividendVyiel =V $.28V/V$ =V .0076,V orV.76%
d 37
TotalVrateVofVreturnV=V–8.11%V+V.76%V=V–7.35%

4.
a. averageVreturnV=V6.0%,VaverageVriskVpremiumV=V2.7%
b. averageVreturnV=V3.3%,VaverageVriskVpremiumV=V0%
c. averageVreturnV=V12.3%,VaverageVriskVpremiumV=V9.0%
d. averageVreturnV=V16.3%,VaverageVriskVpremiumV=V13.0%

5. CherryVaverageVreturn (17% +V 11%V – +V 3 +V 14%)V/ =V 8.60%
V= V 2% % V5

StrawVaverageVreturn (16% +V 18%V – +V 1%V 22%)V/V =V 10.20%
V= V 6% + 5

6. Cherry:VRAV =

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, 8.60%
Var =V 1V/V24VV(.17V –V .086) +2V
V (.11V –V .086) +V (–.02V –V .086) +V (.03V –
2V 2V 2V
=V .00623
V .086) +V (.14V –V .086) 
 
StandardVdeviationV (.00623)
1/2V
.0789,V orV7.89%
= =

Straw:VRBV 10.20%
=




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ORV WRITTENV CONSENTVOFVMCGRAWVHILLVLLC.