SOLUTION MANUAL
Fundamentals Of Investments Valuation And Management
,TABLE OF CONTENT
PART ONE: INTRODUCTION
Chapter 1: A Brief History of Risk and Return
Chapter 2: The Investment Process
Chapter 3: Overview of Security Types
Chapter 4: Mutual Funds, ETFs, and Other Investment Companies
PART TWO: STOCK MARKETS
Chapter 5: The Stock Market
Chapter 6: Common Stock Valuation
Chapter 7: Stock Price Behavior and Market Efficiency
Chapter 8: Behavioral Finance and the Psychology of Investing
PART THREE: INTEREST RATES AND BOND VALUATION
Chapter 9: Interest Rates
Chapter 10: Bond Prices and Yields
PART FOUR: PORTFOLIO MANAGEMENT
Chapter 11: Diversification and Risky Asset Allocation
Chapter 12: Return, Risk, and the Security Market Line
Chapter 13: Performance Evaluation and Risk Management
PART FIVE: FUTURES AND OPTIONS
Chapter 14: Mutual Funds, ETS, and Other Fund Types
Chapter 15: Stock Options
Chapter 16: Option Valuation
PART SIX: TOPICS IN INVESTMENTS
Chapter 17: Alternative Investments
Chapter 18: Corporate and Government Bonds
Chapter 19: Projecting Cash Flow and Earnings
Chapter 20: Global Economic Activity and Industry Analysis
Chapter 21 (online): Mortgage-Backed Securities
,SOLUTION MANUAL FOR
Fundamentals Of Investments Valuation And Management, 10th Edition Jordan
Chapter 1-21
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 Sum The Returns And Divide By The Number Of Returns.
As Such, Arithmetic Returns Do Not Account For The Effects Of Compounding (And, In Particular,
The Effect Of Volatility). Geometric Returns Do Account For The Effects Of Compounding And For
Changes In The Base Used For Each Year’s Calculation Of Returns. 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 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 Expected Rate Of Inflation.
7. Risk Premiums Are About The Same Regardless Of Whether 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.
1
, 9. We Have Seen That T-Bills Barely Kept Up With Inflation Before Taxes. After Taxes, Investors In
T-Bills Actually Lost Ground (Assuming Anything Other Than A Very Low Tax Rate). Thus, An All
T-Bill Strategy Will Probably Lose Money In Real Dollars For A Taxable Investor.
10. It Is Important Not To Lose Sight Of The Fact That The Results We Have Discussed Cover Over 80
Years, Well Beyond The Investing Lifetime For Most Of Us. There Have Been Extended Periods
During Which Small Stocks Have Done Terribly. Thus, One Reason Most Investors Will Choose Not
To Pursue A 100 Percent Stock (Particularly Small-Cap Stocks) Strategy Is That Many Investors
Have Relatively Short Horizons, And High Volatility Investments May Be Very Inappropriate In
Such Cases. There Are Other Reasons, But We Will Defer Discussion Of These To Later Chapters.
11.
Solutions To Questions And Problems
NOTE: All End Of Chapter Problems Were Solved Using A Spreadsheet. Many Problems Require Multiple
Steps. Due To Space And Readability Constraints, When These Intermediate Steps Are Included In This
Solutions Manual, Rounding May Appear To Have Occurred. However, The Final Answer For Each
Problem Is Found Without Rounding During Any Step In The Problem.
Core Questions
1. Total Dollar Return = 100($41 – $37 + $.28) = $428.00
Whether You Choose To Sell The Stock Does Not Affect The Gain Or Loss For The Year; Your
Stock Is Worth What It Would Bring If You Sold It. Whether You Choose To Do So Or Not Is
Irrelevant (Ignoring Commissions And Taxes).
2. Capital Gains Yield $41 – $37 / $37 .1081, Or 10.81% Dividend Yield $.28/$37 .0076, Or .76%
Total Rate Of Return 10.81% .76% 11.57%
3. Dollar Return = 500($34 – $37 + $.28) = –$1,360
Capital Gains Yield $34 – $37 /$37 –.0811, Or –8.11%
Dividend Yield $.28/$37 .0076, Or .76% Total Rate Of Return = –
8.11% + .76% = –7.35%
4.
a. Average Return = 6.0%, Average Risk Premium = 2.7%
b. Average Return = 3.3%, Average Risk Premium = 0%
c. Average Return = 12.3%, Average Risk Premium = 9.0%
d. Average Return = 16.3%, Average Risk Premium = 13.0%
2
Fundamentals Of Investments Valuation And Management
,TABLE OF CONTENT
PART ONE: INTRODUCTION
Chapter 1: A Brief History of Risk and Return
Chapter 2: The Investment Process
Chapter 3: Overview of Security Types
Chapter 4: Mutual Funds, ETFs, and Other Investment Companies
PART TWO: STOCK MARKETS
Chapter 5: The Stock Market
Chapter 6: Common Stock Valuation
Chapter 7: Stock Price Behavior and Market Efficiency
Chapter 8: Behavioral Finance and the Psychology of Investing
PART THREE: INTEREST RATES AND BOND VALUATION
Chapter 9: Interest Rates
Chapter 10: Bond Prices and Yields
PART FOUR: PORTFOLIO MANAGEMENT
Chapter 11: Diversification and Risky Asset Allocation
Chapter 12: Return, Risk, and the Security Market Line
Chapter 13: Performance Evaluation and Risk Management
PART FIVE: FUTURES AND OPTIONS
Chapter 14: Mutual Funds, ETS, and Other Fund Types
Chapter 15: Stock Options
Chapter 16: Option Valuation
PART SIX: TOPICS IN INVESTMENTS
Chapter 17: Alternative Investments
Chapter 18: Corporate and Government Bonds
Chapter 19: Projecting Cash Flow and Earnings
Chapter 20: Global Economic Activity and Industry Analysis
Chapter 21 (online): Mortgage-Backed Securities
,SOLUTION MANUAL FOR
Fundamentals Of Investments Valuation And Management, 10th Edition Jordan
Chapter 1-21
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 Sum The Returns And Divide By The Number Of Returns.
As Such, Arithmetic Returns Do Not Account For The Effects Of Compounding (And, In Particular,
The Effect Of Volatility). Geometric Returns Do Account For The Effects Of Compounding And For
Changes In The Base Used For Each Year’s Calculation Of Returns. 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 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 Expected Rate Of Inflation.
7. Risk Premiums Are About The Same Regardless Of Whether 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.
1
, 9. We Have Seen That T-Bills Barely Kept Up With Inflation Before Taxes. After Taxes, Investors In
T-Bills Actually Lost Ground (Assuming Anything Other Than A Very Low Tax Rate). Thus, An All
T-Bill Strategy Will Probably Lose Money In Real Dollars For A Taxable Investor.
10. It Is Important Not To Lose Sight Of The Fact That The Results We Have Discussed Cover Over 80
Years, Well Beyond The Investing Lifetime For Most Of Us. There Have Been Extended Periods
During Which Small Stocks Have Done Terribly. Thus, One Reason Most Investors Will Choose Not
To Pursue A 100 Percent Stock (Particularly Small-Cap Stocks) Strategy Is That Many Investors
Have Relatively Short Horizons, And High Volatility Investments May Be Very Inappropriate In
Such Cases. There Are Other Reasons, But We Will Defer Discussion Of These To Later Chapters.
11.
Solutions To Questions And Problems
NOTE: All End Of Chapter Problems Were Solved Using A Spreadsheet. Many Problems Require Multiple
Steps. Due To Space And Readability Constraints, When These Intermediate Steps Are Included In This
Solutions Manual, Rounding May Appear To Have Occurred. However, The Final Answer For Each
Problem Is Found Without Rounding During Any Step In The Problem.
Core Questions
1. Total Dollar Return = 100($41 – $37 + $.28) = $428.00
Whether You Choose To Sell The Stock Does Not Affect The Gain Or Loss For The Year; Your
Stock Is Worth What It Would Bring If You Sold It. Whether You Choose To Do So Or Not Is
Irrelevant (Ignoring Commissions And Taxes).
2. Capital Gains Yield $41 – $37 / $37 .1081, Or 10.81% Dividend Yield $.28/$37 .0076, Or .76%
Total Rate Of Return 10.81% .76% 11.57%
3. Dollar Return = 500($34 – $37 + $.28) = –$1,360
Capital Gains Yield $34 – $37 /$37 –.0811, Or –8.11%
Dividend Yield $.28/$37 .0076, Or .76% Total Rate Of Return = –
8.11% + .76% = –7.35%
4.
a. Average Return = 6.0%, Average Risk Premium = 2.7%
b. Average Return = 3.3%, Average Risk Premium = 0%
c. Average Return = 12.3%, Average Risk Premium = 9.0%
d. Average Return = 16.3%, Average Risk Premium = 13.0%
2
