Solution Manual for Fundamentals of Investments Valuation
and Management, 10th Edition by Bradford Jordan and
Thomas Miller and Steve Dolvin
1
,Solution
SOLUTIONManual
MANUAL for
FORFundamentals of Investments Valuation
hy hy
and Management,
Fundamentals of Investments10th Edition
Valuation by Bradford
and Management, Jordan
10th Edition
hy Jordan and
hy hy hy hy hy hy hy
Thomas Miller and Steve Dolvin
Chapter 1-21 hy
Chapter 1 hy
A Brief History of Risk and Return
hy hy hy hy hy hy
Concept Questions hy
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
investment, the higher is its expected return.
hy hy hy hy hy hy hy
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
percent, then the dividend yield must be four percent.
hy hy hy hy hy hy hy hy hy
3. It is impossible to lose more than –100 percent of your investment. Therefore, return
hy hy hy hy hy hy hy hy hy hy hy hy hy
distributions are cut off on the lower tail at –100 percent; if returns were truly normally
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
distributed, you could lose much more.
hy hy hy hy hy hy
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
As such, arithmetic returns do not account for the effects of compounding (and, in particular,
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
the effect of volatility). Geometric returns do account for the effects of compounding and for
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
changes in the base used for each year’s calculation of returns. As an investor, the more
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
important return of an asset is the geometric return.
hy hy hy hy hy hy hy hy hy
5. Blume’s formula uses the arithmetic and geometric returns along with the number of
hy hy hy hy hy hy hy hy hy hy hy hy
observations to approximate a holding period return. When predicting a holding period return,
hy hy hy hy hy hy hy hy hy hy hy hy hy
the arithmetic return will tend to be too high and the geometric return will tend to be too low.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
Blume’s formula adjusts these returns for different holding period expected returns.
hy hy hy hy hy hy hy hy hy hy hy
6. T-bill rates were highest in the early eighties since inflation at the time was relatively high.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
As we discuss in our chapter on interest rates, rates on T-bills will almost always be slightly
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
higher than the expected rate of inflation.
hy hy hy hy hy hy hy
7. Risk premiums are about the same regardless of whether we account for inflation. The reason
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
is that risk premiums are the difference between two returns, so inflation essentially nets out.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax
hy hy hy hy hy hy hy hy hy hy hy hy hy
returns are smaller than pretax returns.
hy hy hy hy hy hy
2
,Solution Manual for Fundamentals of Investments Valuation
and Management, 10th Edition by Bradford Jordan and
Thomas Miller and Steve Dolvin
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
T-bills actually lost ground (assuming anything other than a very low tax rate). Thus, an all T-bill
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
strategy will probably lose money in real dollars for a taxable investor.
hy hy hy hy hy hy hy hy hy hy hy hy
10. It is important not to lose sight of the fact that the results we have discussed cover over 80
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
years, well beyond the investing lifetime for most of us. There have been extended periods
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
during which small stocks have done terribly. Thus, one reason most investors will choose
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
not to pursue a 100 percent stock (particularly small-cap stocks) strategy is that many investors
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
have relatively short horizons, and high volatility investments may be very inappropriate in
hy hy hy hy hy hy hy hy hy hy hy hy hy
such cases. There are other reasons, but we will defer discussion of these to later chapters.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
11.
Solutions to Questions and Problems
hy hy hy hy
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
steps. Due to space and readability constraints, when these intermediate steps are included in this
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
solutions manual, rounding may appear to have occurred. However, the final answer for each
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
problem is found without rounding during any step in the problem.
hy hy hy hy hy hy hy hy hy hy hy
Core Questions
hy
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
hy hy hy hy hy hy hy hy hy hy
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
is worth what it would bring if you sold it. Whether you choose to do so or not is irrelevant
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
(ignoring commissions and taxes).
hy hy hy hy
2. Capital gains yield hy hy h y h y h y $41 – $37 hy hy h y h y / $37hy h y h y .1081, or 10.81% Dividend yieldhy hy hy hy h y h y $.28/$37
h y .0076, or .76%
h y hy hy
Total rate of return hy hy hy h y h y 10.81% h y h y .76% h y h y 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
hy hy hy hy hy hy hy hy hy
Capital h y gains h y yield h y h y h y h y $34 h y – h y $37 h y h y /$37 h y h y h y –.0811, h y or h y –8.11%
Dividend yield $.28/$37 .0076, or .76% Total rate of return =
hy hy hy hy hy hy hy hy
– 8.11% + .76% = –7.35%
hy hy hy hy hy hy
4.
a. average hy return hy = hy 6.0%, average risk premium = 2.7%
hy hy hy hy hy
b. average hy return hy = hy 3.3%, average risk premium = 0%
hy hy hy hy hy
c. average hy return hy = hy 12.3%, average risk premium = 9.0%
hy hy hy hy hy
d. average hy return hy = hy 16.3%, average risk premium = 13.0%
hy hy hy hy hy
3
, Solution Manual for Fundamentals of Investments Valuation
and Management, 10th Edition by Bradford Jordan and
Thomas Miller and Steve Dolvin
5. Cherry average return hy hy 17% 11% – 2% 3% hy hy 14% h y h y /5 8.60% Straw average return hy hy hy hy
16% 18% – 6% 1% hy hy 22% h y h y /5 10.20%
6. Cherry: RA 8.60% hy
2 2 2 2 2
Var 1/ 4 .17 – .086 hy hy h y h y .11 – .086 hy hy h y h y –.02 – .086
hy hy h y h y .03 – .086 hy hy h y h y .14 – .086hy hy h y h y .00623
1/2
Standard deviation hy .00623 h y h y .0789, or 7.89% hy hy
Straw: RB 10.20% hy
Var 1/ 4 hy .16 – .102 hy hy
2 .18 – .102 hy hy h y h y
2 –.06 – .102 hy hy h y h y
2 .01 – .102 hy hy h y h y
2 .22 – .102 hy hy h y h y
2
.01452 hy
1/2
Standard deviation hy .01452 h y h y .1205, or 12.05% hy hy
7. The capital gains yield is $59 – $65
hy hy hy hy hy hy h y /$65 –.0923, or –9.23% (notice the negative sign). With
hy hy hy hy hy hy hy
hy a dividend yield of 1.2 percent, the total return is –8.03%.
hy hy hy hy hy hy hy hy hy hy
8. Geometric return hy 1 .17 1 .11 1 .02 1 .03 1 .14 (1/5) h y
– 1 .0837,
hy
or 8.37%
hy
9. Arithmetic return hy .21 .12 .07 –.13 – .04 .26
hy hy hy h y h y / 6.0817, or 8.17%
hy hy hy
(1/6)
Geometric return hy 1 .21 1 .12 1 .07 1 – .13
hy hy 1 – .04
hy hy 1 .26 – h y 1
h y
.0730, or 7.30% hy hy
Intermediate Questions hy
10. That’s plus or minus one standard deviation, so about two-thirds of the time, or two years out of
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
three. In one year out of three, you will be outside this range, implying that you will be below it
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
one year out of six and above it one year out of six.
hy hy hy hy hy hy hy hy hy hy hy hy hy
4
and Management, 10th Edition by Bradford Jordan and
Thomas Miller and Steve Dolvin
1
,Solution
SOLUTIONManual
MANUAL for
FORFundamentals of Investments Valuation
hy hy
and Management,
Fundamentals of Investments10th Edition
Valuation by Bradford
and Management, Jordan
10th Edition
hy Jordan and
hy hy hy hy hy hy hy
Thomas Miller and Steve Dolvin
Chapter 1-21 hy
Chapter 1 hy
A Brief History of Risk and Return
hy hy hy hy hy hy
Concept Questions hy
1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
investment, the higher is its expected return.
hy hy hy hy hy hy hy
2. Since the price didn’t change, the capital gains yield was zero. If the total return was four
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
percent, then the dividend yield must be four percent.
hy hy hy hy hy hy hy hy hy
3. It is impossible to lose more than –100 percent of your investment. Therefore, return
hy hy hy hy hy hy hy hy hy hy hy hy hy
distributions are cut off on the lower tail at –100 percent; if returns were truly normally
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
distributed, you could lose much more.
hy hy hy hy hy hy
4. To calculate an arithmetic return, you sum the returns and divide by the number of returns.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
As such, arithmetic returns do not account for the effects of compounding (and, in particular,
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
the effect of volatility). Geometric returns do account for the effects of compounding and for
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
changes in the base used for each year’s calculation of returns. As an investor, the more
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
important return of an asset is the geometric return.
hy hy hy hy hy hy hy hy hy
5. Blume’s formula uses the arithmetic and geometric returns along with the number of
hy hy hy hy hy hy hy hy hy hy hy hy
observations to approximate a holding period return. When predicting a holding period return,
hy hy hy hy hy hy hy hy hy hy hy hy hy
the arithmetic return will tend to be too high and the geometric return will tend to be too low.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
Blume’s formula adjusts these returns for different holding period expected returns.
hy hy hy hy hy hy hy hy hy hy hy
6. T-bill rates were highest in the early eighties since inflation at the time was relatively high.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
As we discuss in our chapter on interest rates, rates on T-bills will almost always be slightly
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
higher than the expected rate of inflation.
hy hy hy hy hy hy hy
7. Risk premiums are about the same regardless of whether we account for inflation. The reason
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
is that risk premiums are the difference between two returns, so inflation essentially nets out.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
8. Returns, risk premiums, and volatility would all be lower than we estimated because aftertax
hy hy hy hy hy hy hy hy hy hy hy hy hy
returns are smaller than pretax returns.
hy hy hy hy hy hy
2
,Solution Manual for Fundamentals of Investments Valuation
and Management, 10th Edition by Bradford Jordan and
Thomas Miller and Steve Dolvin
9. We have seen that T-bills barely kept up with inflation before taxes. After taxes, investors in
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
T-bills actually lost ground (assuming anything other than a very low tax rate). Thus, an all T-bill
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
strategy will probably lose money in real dollars for a taxable investor.
hy hy hy hy hy hy hy hy hy hy hy hy
10. It is important not to lose sight of the fact that the results we have discussed cover over 80
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
years, well beyond the investing lifetime for most of us. There have been extended periods
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
during which small stocks have done terribly. Thus, one reason most investors will choose
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
not to pursue a 100 percent stock (particularly small-cap stocks) strategy is that many investors
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
have relatively short horizons, and high volatility investments may be very inappropriate in
hy hy hy hy hy hy hy hy hy hy hy hy hy
such cases. There are other reasons, but we will defer discussion of these to later chapters.
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
11.
Solutions to Questions and Problems
hy hy hy hy
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
steps. Due to space and readability constraints, when these intermediate steps are included in this
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
solutions manual, rounding may appear to have occurred. However, the final answer for each
hy hy hy hy hy hy hy hy hy hy hy hy hy hy
problem is found without rounding during any step in the problem.
hy hy hy hy hy hy hy hy hy hy hy
Core Questions
hy
1. Total dollar return = 100($41 – $37 + $.28) = $428.00
hy hy hy hy hy hy hy hy hy hy
Whether you choose to sell the stock does not affect the gain or loss for the year; your stock
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
is worth what it would bring if you sold it. Whether you choose to do so or not is irrelevant
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
(ignoring commissions and taxes).
hy hy hy hy
2. Capital gains yield hy hy h y h y h y $41 – $37 hy hy h y h y / $37hy h y h y .1081, or 10.81% Dividend yieldhy hy hy hy h y h y $.28/$37
h y .0076, or .76%
h y hy hy
Total rate of return hy hy hy h y h y 10.81% h y h y .76% h y h y 11.57%
3. Dollar return = 500($34 – $37 + $.28) = –$1,360
hy hy hy hy hy hy hy hy hy
Capital h y gains h y yield h y h y h y h y $34 h y – h y $37 h y h y /$37 h y h y h y –.0811, h y or h y –8.11%
Dividend yield $.28/$37 .0076, or .76% Total rate of return =
hy hy hy hy hy hy hy hy
– 8.11% + .76% = –7.35%
hy hy hy hy hy hy
4.
a. average hy return hy = hy 6.0%, average risk premium = 2.7%
hy hy hy hy hy
b. average hy return hy = hy 3.3%, average risk premium = 0%
hy hy hy hy hy
c. average hy return hy = hy 12.3%, average risk premium = 9.0%
hy hy hy hy hy
d. average hy return hy = hy 16.3%, average risk premium = 13.0%
hy hy hy hy hy
3
, Solution Manual for Fundamentals of Investments Valuation
and Management, 10th Edition by Bradford Jordan and
Thomas Miller and Steve Dolvin
5. Cherry average return hy hy 17% 11% – 2% 3% hy hy 14% h y h y /5 8.60% Straw average return hy hy hy hy
16% 18% – 6% 1% hy hy 22% h y h y /5 10.20%
6. Cherry: RA 8.60% hy
2 2 2 2 2
Var 1/ 4 .17 – .086 hy hy h y h y .11 – .086 hy hy h y h y –.02 – .086
hy hy h y h y .03 – .086 hy hy h y h y .14 – .086hy hy h y h y .00623
1/2
Standard deviation hy .00623 h y h y .0789, or 7.89% hy hy
Straw: RB 10.20% hy
Var 1/ 4 hy .16 – .102 hy hy
2 .18 – .102 hy hy h y h y
2 –.06 – .102 hy hy h y h y
2 .01 – .102 hy hy h y h y
2 .22 – .102 hy hy h y h y
2
.01452 hy
1/2
Standard deviation hy .01452 h y h y .1205, or 12.05% hy hy
7. The capital gains yield is $59 – $65
hy hy hy hy hy hy h y /$65 –.0923, or –9.23% (notice the negative sign). With
hy hy hy hy hy hy hy
hy a dividend yield of 1.2 percent, the total return is –8.03%.
hy hy hy hy hy hy hy hy hy hy
8. Geometric return hy 1 .17 1 .11 1 .02 1 .03 1 .14 (1/5) h y
– 1 .0837,
hy
or 8.37%
hy
9. Arithmetic return hy .21 .12 .07 –.13 – .04 .26
hy hy hy h y h y / 6.0817, or 8.17%
hy hy hy
(1/6)
Geometric return hy 1 .21 1 .12 1 .07 1 – .13
hy hy 1 – .04
hy hy 1 .26 – h y 1
h y
.0730, or 7.30% hy hy
Intermediate Questions hy
10. That’s plus or minus one standard deviation, so about two-thirds of the time, or two years out of
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
three. In one year out of three, you will be outside this range, implying that you will be below it
hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy hy
one year out of six and above it one year out of six.
hy hy hy hy hy hy hy hy hy hy hy hy hy
4
