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# If returns of S&P 500 stocks are normally distributed, what range of returns would

you expect to see 95% of the time. Base your answer on the information below.

Average
Return
Standard
Deviation of
returns

Small Stocks

S&P 500
11.19%

Corporate
Bonds
6.66%

21.66%
42.65%

T-Bills
4.74%

20.73%

7.29%

3.46%

## To find the 95% confidence interval, use the following formulas

Average + (2 x standard deviation)
And
Average (2 x standard deviation)
11.19%+(2 x 20.73%) and 11.19-(2 x 20.73%)
= - 30.27% and 52.65%

Use the data for Starbucks (SBUX) and Google (GOOG) to answer the following
questions:
a. What is the return for SBUX over the period without including its dividends?
With the dividends?
b. What is the return for GOOG over the period?
c. If you have 31% of your portfolio in SBUX and 69% in GOOG, what was the
return on your portfolio excluding dividends?

Date
2011-11-14
2012-02-06
2012-05-07
2012-08-06
2012-12-13

SBUX
\$43.64
\$48.29
\$55.48
\$43.48
\$53.18

Dividend
0.00
0.17
0.17
0.17
0.21

GOOG
\$613.00
\$609.09
\$607.55
\$642.82
\$659.05

Dividend
0.00
0.00
0.00
0.00
0.00

A. The return for SBUX over the period without including its dividend is:
R = P2/P1 x P3/P2 x P4/P3 x P5/P4 1
48.29/43.64 x 55.48/48.29 x 43.48/55.48 x 53.18/43.48 1 = 21.86%

## The return with the dividends is:

R = P2 + Div2 / P1 1
48.29+0.17 / 43.64 x 55.48+0.17 / 48.29 x 43.48+0.17 / 55.48 x 53.18 +
0.21 / 43.48 1 = 23.63%
B. The return for GOOG is:
R = 609.09 / 613.00 x 607.55 / 609.09 x 642.82 / 607.55 x 659.05 / 642.82
1 = 7.51%

## C. The return on your portfolio excluding dividends is:

R = w1 x R1 + w2 x R2
0.31 x 21.86% + .069 x 7.51% = 11.96%

## Explain the difference between an arithmetic average return and a geometric

average return. Are both useful? If so, explain why?
A: Both numbers are useful. The geometric average return tells you what you would
actually make if you held the stock over this period. You can use the arithmetic
average return over the period as an estimate of the expected return. If you use this
estimate, it is what you would expect to make in the next period.

You bought a stock one year ago for \$49.24 per share and sold it today for \$55.13
per share. It paid a \$1.01 per share dividend today. What was your realized return?
A: Rt + 1 = Div t + 1 + (Pt+1 Pt) / Pt
\$1.01 + (55.13-49.24) / 49.24 = \$14.0%

Consider two local banks. Bank A has 90 loans outstanding, each for \$1.0 million,
that it expected will be repaid today. Each loan has a 5% probability of default, in
which case the bank is not repaid anything. The chance of default is independent
across all the loans. Bank B has only one loan of \$90 million outstanding, which it
also expects will be repaid today. It also has a 5% probability of not being repaid.
Calculate the following:
a. The expected overall payoff of each bank.

## b. The standard deviation of the overall payoff of each bank.

A:
a.
E[R]Sigma pR x R
Bank A = E[R] = 1 million x 0.95 x 90 = \$86 million.
Bank B = E[R] = 90 million x 0.95 = \$86 million.
b.
Variance of each loan for Bank A = ((1-.95)^2 x 0.95) + (0-0.95)^2 x 0.05 = 0.0475
Sqrt 0.0475 = 0.217945 = 21.7945%
Standard Deviation of the average loan = 0.217945 / Sqrt 90 = 0.022973
Standard Deviation of portfolio = 90 loans x 0.022973 = 2.0676
Standard deviation of the overall payoff of Bank B is:
Variance of the loan for Bank B = ((90-86)^2 x 0.95) + (0-86)^2 x 0.05 = 385
Standard deviation of the loan = Sqrt 385 = 19.62

You bought a stock one year ago for \$51.06 per share and sold it today for \$58.69
per share. It paid a \$1.63 per share dividend today. If you assume that the stock fell
a. Is your capital gain different? Why or why not?
b. Is your dividend yield different? Why or why not?
If you assume that the stock feel \$6.72 to \$44.34 instead, the capital gain is
different because the difference between the current price and the purchase price is
difference than in the first case. The dividend yield will not be different because the
change in selling price does not effect the dividend yield. The dividend yield is equal
to the dividend, which did not change, divided by the price paid per share, which is
not effected by the change in selling price.
A:
a. The capital gain will be different because the selling price has changed.
b. The dividend yield will not be different because the dividend is the same and
the change in selling price does not effect the dividend yield.

## Ten annual returns are listed in the following table:

-19.4 16.6 18.4 -49.3 43.4 1.5 -16.9 45.7 44.5 -3.5.

## a. What is the arithmetic average return over the 10-year period?

b. What is the geometric average return over the 10-year period?
c. If you invested \$100 at the beginning how much would you have at the end?