Solutions for Fundamentals of Investments Valuation and Management, 10th Edition Jordan (All Chapters included)

SolutionManualforFundamentals s s s nn




and Management, 10th Edition by Bradford Jordan and
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Thomas Miller and Steve Dolvin
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SOLUTION MANUAL FOR s s s s




Fundamentals of Investments Valuation and Management,10thEditionJordan nn ss ss ss nn s s s




Chapter1-21 s




Chapter1 s




ABrief History of Risk and Return
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Concept Questions ss




1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an
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investment, the higher is its expected return.
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2. Since the price didn’t change, the capital gains yield was zero.
ss ss ss s s ss ss ss ss s s ss s s If the total return was four
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percent, then the dividend yield must be four percent.
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3. It is impossible to lose more than –100 percent of your investment. Therefore, return
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distributions are cut off on the lower tail at –100 percent; if returns were truly normally distributed,
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you could lose much more.
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4. To calculate an arithmetic return, you sum the returns and divide by the number
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of returns. As such, arithmetic returns do not account for the effects of
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compounding (and, in particular, the effect of volatility). Geometric returns do account
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for the effects of compounding and for changes in the base used for each year’s calculation
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of returns. As an investor, the more important return of an asset is the geometric return.
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5. Blume’s formula uses the arithmetic and geometric returns along with the number of
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observations to approximate a holding period return. When predicting a holding period return, the
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arithmetic return will tend to be too high and the geometric return will tend to be too low.
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Blume’s formula adjusts these returns for different holding period expected returns.
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6. T-bill rates were highest in the early eighties since inflation at the time was relatively high. As we
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discuss in our chapter on interest rates, rates on T-bills will almost always be slightly
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higher than the expected rate of inflation.
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7. Risk premiums are about the same regardless of whether we account for inflation. The reason
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is
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,SolutionManualforFundamentals s s s nn




and Management, 10th Edition by Bradford Jordan and
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Thomas Miller and Steve Dolvin
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that risk premiums are the difference between two returns, so inflation essentially nets out.
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8. Returns, risk premiums, and volatility would all be lower than we estimated because
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aftertax returns are smaller than pretax returns.
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1

,SolutionManualforFundamentals s s s nn




and Management, 10th Edition by Bradford Jordan and
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Thomas Miller and Steve Dolvin
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9. We have seen that T-bills barely kept up with inflation before taxes. After taxes,
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investors in T- bills actually lost ground (assuming anything other than a very low tax rate).
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Thus, an all T-bill strategy will probably lose money in real dollars for a taxable investor.
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10. It is important not to lose sight of the fact that the results we have discussed cover over
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80 years, well beyond the investing lifetime for most of us. There have been extended periods
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during which small stocks have done terribly. Thus, one reason most investors will choose not to
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pursue a 100 percent stock (particularly small-cap stocks) strategy is that many investors have
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relatively short horizons, and high volatility investments may be very inappropriate in such cases.
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There are other reasons, but we will defer discussion of these to later chapters.
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11.

Solutions to Questions and Problems
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NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
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Due to space and readability constraints, when these intermediate steps are included in this solutions
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manual, rounding may appear to have occurred. However, the final answer for each problem is found
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without rounding during any step in the problem.
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Core Questions
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1. Total dollar return = 100($41 – $37 + $.28) = $428.00
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Whether you choose to sell the stock does not affect the gain or loss for the year;
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your stock is worth what it would bring if you sold it. Whether you choose to
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do so or not is irrelevant (ignoring commissions and taxes).
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2. Capital gains ss s s yield $41 – $37 s s ss / $37 .1081, or 10.81% Dividend yield $.28/$37
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or
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.76%

Totalrate of return s ss ss s s s s 10.81% s s s s s s .76% s s s s s s 11.57%

3. Dollar return = 500($34 – $37 + $.28) = –$1,360
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Capital gains yield $34 – $37 /$37 –.0811, s s s s s s s s s s




or –8.11% Dividend yield $.28/$37
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ss Total rate of return = – 8.11% + .76% = –7.35%
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4.
a. average ss return = 6.0%, average ss ss ss s s risk premium= 2.7% ss ss



b. average ss return = 3.3%, average ss ss ss s s risk premium= 0% ss ss



c. average ss return = 12.3%, average ss ss ss s s risk premium = 9.0% ss ss ss



d. average ss return = 16.3%, average ss ss ss ss risk premium= 13.0% ss s ss




2

, SolutionManualforFundamentals s s s nn




and Management, 10th Edition by Bradford Jordan and
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Thomas Miller and Steve Dolvin
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5. Cherry average return ss s s 17% 11% – 2% s s s s 3% 14% /5 s s 8.60% Straw s s



average return
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16% 18% – 6% ss ss 1% 22% s s /5 10.20%

6. Cherry:RA s 8.60%

2 2 2 2 2
Var 1/ 4 .17 – .086 s s ss .11 – .086 s s ss –.02 – .086 s s ss .03 – .086 s s ss .14 – .086 s s ss



.006


1/2
Standard deviation ss .00623 .0789, or 7.89% ss ss




Straw: RB ss 10.20%
2 2 2 2
Var 1/ 4 s s .16 – .102 ss ss n .18 – .102 ss ss –.06 – .102 ss ss .01 – .102 ss ss .22 – .102 ss ss


2


.01452
1/2
Standard deviation ss .01452 .1205, or 12.05% ss ss




7. The capital gains yield is
ss ss ss ss $59 – $65 ss ss s s /$65 –.0923, or –9.23% (notice the negative sign). With
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ss a dividend yield of 1.2 percent, the total return is –8.03%.
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8. Geometric return nn 1 .17 1 .11 1 .02 1 .03 1 .14 (1/5)
– 1 .0837,
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or 8.37% ss




9. Arithmetic return ss .21 .12 .07 –.13 – .04 . .0817, or 8.17%
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(1/6)

Geometric return ss 1 .21 1 .12 1 .07 1 – .13
ss ss 1 – .04
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1
.0730, or 7.30% ss ss




Intermediate Questions ss




10. That’s plus or minus one standard deviation, so about two-thirds of the time, or two years out
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of three. In one year out of three, you will be outside this range, implying that you will
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be below it one year out of six and above it one year out of six.
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