Score: 12.

50

1.

out of 14 points (89.29%)

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-2 Calculating Returns [LO 1]

Suppose a stock had an initial price of $91 per share, paid a dividend of $2.20 per share during the year,
and had an ending share price of $75.00.
Requirement 1:
Compute the percentage total return. (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Percentage total return

-15.16

Requirement 2:
What was the dividend yield? (Do not round intermediate calculations. Enter your answer as a
percentage rounded to 2 decimal places (e.g., 32.16).)
Dividend yield

2.42

Requirement 3:
What was the capital gains yield? (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Capital gains yield

Worksheet

-17.58

Problem 10-2 Calculating Returns [LO 1]

Learning Objective: 10-01 Calculate the

return on an investment.

Problem 10-2 Calculating Returns [LO 1]

Suppose a stock had an initial price of $91 per share, paid a dividend of $2.20 per share during the year,
and had an ending share price of $75.00.
Requirement 1:
Compute the percentage total return. (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Percentage total return

-15.16 1% %

Requirement 2:
What was the dividend yield? (Do not round intermediate calculations. Enter your answer as a
percentage rounded to 2 decimal places (e.g., 32.16).)
Dividend yield

2.42 1% %

Requirement 3:
What was the capital gains yield? (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Capital gains yield
Explanation:

1:

-17.58 1% %

Using the equation for total return, we find:

R = [($75.00 91) + 2.20] / $91
R = .1516, or 15.16%
2:
And the dividend yield and capital gains yield are:
Dividend yield = $2.20 / $91
Dividend yield = .0242, or 2.42%
3:
Capital gains yield = ($75.00 91) / $91
Capital gains yield = .1758, or 17.58%

2.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-7 Calculating Returns and Variability [LO 1]

Use the following returns for X and Y.
Year
1
2
3
4
5

Returns
X
Y
21.3%
24.9%
16.3
3.3
9.3
26.9
18.6
13.6
4.3
30.9

Requirement 1:
Calculate the average returns for X and Y. (Do not round intermediate calculations. Enter your
answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average returns
7.44
%
13.16
%

X
Y

Requirement 2:
Calculate the variances for X and Y. (Do not round intermediate calculations. Round your answers to
6 decimal places (e.g., 32.161616).)
Variances
0.022338
0.040708

X
Y

Requirement 3:
Calculate the standard deviations for X and Y. (Do not round intermediate calculations. Enter your
answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Standard deviations
14.95
%
20.18
%

X
Y

Problem 10-7 Calculating Returns and

Variability [LO 1]

Worksheet

Problem 10-7 Calculating Returns and Variability [LO 1]

Use the following returns for X and Y.
Year
1
2
3
4

Returns
X
Y
21.3%
24.9%
16.3
3.3
9.3
26.9
18.6
13.6

Learning Objective: 10-01 Calculate the

return on an investment.

4.3

30.9

Requirement 1:
Calculate the average returns for X and Y. (Do not round intermediate calculations. Enter your
answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Average returns
7.44 1% %
13.16 1% %

Requirement 2:
Calculate the variances for X and Y. (Do not round intermediate calculations. Round your answers to
6 decimal places (e.g., 32.161616).)

X
Y

Variances
0.022339 0.00001
0.040709 0.00001

Requirement 3:
Calculate the standard deviations for X and Y. (Do not round intermediate calculations. Enter your
answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
X
Y

Standard deviations
14.95 1% %
20.18 1% %

Explanation:

1:
The average return is the sum of the returns, divided by the number of returns. The average return for each
stock was:

2:
Remembering back to "sadistics," we calculate the variance of each stock as:

3:
The standard deviation is the square root of the variance, so the standard deviation of each stock is:
X = (.022339)1/2
sX = .1495, or 14.95%
Y = (.040709)1/2
Y = .2018, or 20.18%

3.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-8 Risk Premiums [LO 2]

Consider the following table for a period of six years.
Returns
Year
Year 1
Year 2
Year 3
Year 4

Large-Company
Stocks
15.89%
26.83
37.47
24.17

U.S.
Treasury Bills
7.53%
8.11
6.11
6.27

Year 5
Year 6

7.64
6.81

5.57
8.00

Requirement 1:
Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. (Do
not round intermediate calculations. Enter your answers as a percentage rounded to 2
decimal places (e.g., 32.16).)

Large-company stock
T-bills

Arithmetic average
returns
3.02
%
6.93
%

Requirement 2:
Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period.
(Do not round intermediate calculations. Enter your answers as a percentage rounded to 2
decimal places (e.g., 32.16).)
Large-company stock
T-bills

Standard deviation
24.45
%
1.08
%

Requirement 3:
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills.
(a) What was the arithmetic average risk premium over this period? (Negative amount should be
indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a
percentage rounded to 2 decimal places (e.g., 32.16).)
Risk premium

-3.92

(b) What was the standard deviation of the risk premium over this period? (Do not round intermediate
calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Risk premium standard deviation

25.13

Worksheet

Problem 10-8 Risk Premiums [LO 2]

Learning Objective: 10-02 Discuss the

historical returns on various important types
of investments.

Problem 10-8 Risk Premiums [LO 2]

Consider the following table for a period of six years.
Returns
Year
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6

Large-Company
Stocks
15.89%
26.83
37.47
24.17
7.64
6.81

U.S.
Treasury Bills
7.53%
8.11
6.11
6.27
5.57
8.00

Requirement 1:
Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. (Do
not round intermediate calculations. Enter your answers as a percentage rounded to 2
decimal places (e.g., 32.16).)

Large-company stock
T-bills

Arithmetic average
returns
3.02 1% %
6.93 1% %

Requirement 2:
Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period.
(Do not round intermediate calculations. Enter your answers as a percentage rounded to 2
decimal places (e.g., 32.16).)
Large-company stock
T-bills

Standard deviation
24.54 1% %
1.08 1% %

Requirement 3:
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills.
(a) What was the arithmetic average risk premium over this period? (Negative amount should be
indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a
percentage rounded to 2 decimal places (e.g., 32.16).)
Risk premium

-3.92 1% %

(b) What was the standard deviation of the risk premium over this period? (Do not round intermediate
calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Risk premium standard deviation

25.13 1% %

Explanation:

We will calculate the sum of the returns for each asset and the observed risk premium first. Doing so, we
get:
Year
1973
1974
1975
1976
1977
1978
Total

Large co. stock return

15.89%
26.83
37.47
24.17
7.64
6.81
18.09%

T-bill return
7.53%
8.11
6.11
6.27
5.57
8.00
41.59%

Risk premium
23.42%
34.94
31.36
17.90
13.21
1.19
23.50%

1:
The average return for large-company stocks over this period was:
Large-company stock average return = 18.09% / 6
Large-company stock average return = 3.02%
And the average return for T-bills over this period was:
T-bills average return = 41.59% / 6
T-bills average return = 6.93%
2:
Using the equation for variance, we find the variance for large company stocks over this period was:
Variance = 1/5[(.1589 .0302)2 + (.2683 .0302)2 + (.3747 .0302)2 + (.2417 .0302)2 +
(.0764 .0302)2 + (.0681 .0302)2]
Variance = .060215
And the standard deviation for largecompany stocks over this period was:
Standard deviation = (.060215)1/2
Standard deviation = .2454, or 24.54%
Using the equation for variance, we find the variance for T-bills over this period was:

Variance = 1/5[(.0753 .0693)2 + (.0811 .0693)2 + (.0611 .0693)2 + (.0627 .0693)2 +

(.0557 .0693)2 + (.0800 .0693)2]
Variance = .000117
And the standard deviation for T-bills over this period was:
Standard deviation = (.000117)1/2
Standard deviation = .0108, or 1.08%
3:
(a)
The average observed risk premium over this period was:
Average observed risk premium = 23.50% / 6
Average observed risk premium = 3.92%
(b)
The variance of the observed risk premium was:
Variance = 1/5[(.2342 (.0392))2 + (.3494 (.0392))2 + (.3136 (.0392))2 +
(.1790 (.0392))2 + (.1321 (.0392))2 + (.0119 (.0392))2]
Variance = .063141
And the standard deviation of the observed risk premium was:
Standard deviation = (.063141)1/2
Standard deviation = .2513, or 25.13%

4.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-10 Calculating Real Returns and Risk Premiums [LO 1]

Youve observed the following returns on Doyscher Corporations stock over the past five years: 29.1
percent, 16.4 percent, 35.8 percent, 3.7 percent, and 22.7 percent. The average inflation rate over this
period was 3.37 percent and the average T-bill rate over the period was 4.3 percent.
Required:
(a) What was the average real return on the stock? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average real return

6.32

(b) What was the average nominal risk premium on the stock? (Do not round intermediate
calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average nominal risk premium

Worksheet

5.60

Problem 10-10 Calculating Real Returns and Learning Objective: 10-01 Calculate the
Risk Premiums [LO 1]
return on an investment.

Problem 10-10 Calculating Real Returns and Risk Premiums [LO 1]

Youve observed the following returns on Doyscher Corporations stock over the past five years: 29.1
percent, 16.4 percent, 35.8 percent, 3.7 percent, and 22.7 percent. The average inflation rate over this
period was 3.37 percent and the average T-bill rate over the period was 4.3 percent.
Required:
(a) What was the average real return on the stock? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average real return

6.32 1% %

(b) What was the average nominal risk premium on the stock? (Do not round intermediate
calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average nominal risk premium

5.60 1% %

Explanation:

To find the average return, we sum all the returns and divide by the number of returns, so:
Arithmetic average return = (.291 + .164 + .358 + .037 + .227)/5
Arithmetic average return = .0990, or 9.90%
(a)
To calculate the average real return, we can use the average return of the asset, and the average inflation
rate in the Fisher equation. Doing so, we find:
(1 + R) = (1 + r)(1 + h)
= (1.0990 / 1.0337) 1
= .0632, or 6.32%
(b)
The average risk premium is simply the average return of the asset, minus the average risk-free rate, so,
the average risk premium for this asset would be:

= .0990 .043
= .0560, or 5.60%

5.

award:

0.50 out of
1.00 point

You did not receive credit for this question in a previous attempt

Problem 10-11 Calculating Real Rates [LO 1]

Youve observed the following returns on Doyscher Corporations stock over the past five years: 25.2
percent, 13.8 percent, 30.6 percent, 2.4 percent, and 21.4 percent. The average inflation rate over this
period was 3.24 percent and the average T-bill rate over the period was 4.3 percent.
Requirement 1:
What was the average real risk-free rate over this time period? (Do not round intermediate calculations.
Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average real risk-free rate

1.03

Requirement 2:
What was the average real risk premium? (Do not round intermediate calculations. Enter your answer
as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average real risk premium

Worksheet

n/r

Problem 10-11 Calculating Real Rates [LO 1]

Learning Objective: 10-01 Calculate the

return on an investment.

Problem 10-11 Calculating Real Rates [LO 1]

Youve observed the following returns on Doyscher Corporations stock over the past five years: 25.2
percent, 13.8 percent, 30.6 percent, 2.4 percent, and 21.4 percent. The average inflation rate over this
period was 3.24 percent and the average T-bill rate over the period was 4.3 percent.
Requirement 1:
What was the average real risk-free rate over this time period? (Do not round intermediate calculations.
Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average real risk-free rate

1.03 0.01 %

Requirement 2:
What was the average real risk premium? (Do not round intermediate calculations. Enter your answer
as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average real risk premium

4.17 1% %

Explanation:

1:
We can find the average real risk-free rate using the Fisher equation. The average real risk-free rate was:
(1 + R) = (1 + r)(1 + h)
= (1.0430 / 1.0324) 1
= .0103, or 1.03%
2:
To find the average return, we sum all the returns and divide by the number of returns, so:
Arithmetic average return = (.252 + .138 + .306 + .024 + .214)/5
Arithmetic average return = .0860, or 8.60%
To calculate the average real return, we can use the average return of the asset, and the average inflation
rate in the Fisher equation. Doing so, we find:
(1 + R) = (1 + r)(1 + h)
= (1.0860 / 1.0324) 1
= .0519, or 5.19%
And to calculate the average real risk premium, we can subtract the average risk-free rate from the
average real return. So, the average real risk premium was:

6.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-15 Calculating Returns [LO 1]

You bought a stock three months ago for $77.82 per share. The stock paid no dividends. The current share
price is $82.09.
Required:
What is the APR and EAR of your investment? (Do not round intermediate calculations. Enter your
answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
APR
EAR

Investment
21.95
%
23.82
%

Worksheet

Problem 10-15 Calculating Returns [LO 1]

Learning Objective: 10-01 Calculate the

return on an investment.

Problem 10-15 Calculating Returns [LO 1]

You bought a stock three months ago for $77.82 per share. The stock paid no dividends. The current share
price is $82.09.
Required:
What is the APR and EAR of your investment? (Do not round intermediate calculations. Enter your
answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
APR
EAR

Investment
21.95 1% %
23.82 1% %

Explanation:

The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial
price. This stock paid no dividend, so the return was:
R = ($82.09 77.82) / $77.82
R = .0549, or 5.49%
This is the return for three months, so the APR is:
APR = 4(5.49%)
APR = 21.95%
And the EAR is:
EAR = (1 + .0549)4 1
EAR = .2382, or 23.82%

7.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-19 Calculating Returns and Variability [LO1]

You find a certain stock that had returns of 12.8 percent, 21.4 percent, 27.4 percent, and 18.4 percent for
four of the last five years. Assume the average return of the stock over this period was 10.80 percent.
Requirement 1:
What was the stocks return for the missing year? (Do not round intermediate calculations. Enter your
answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Stock's return

16.80

Requirement 2:
What is the standard deviation of the stocks returns? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Standard deviation

18.77

Problem 10-19 Calculating Returns and

Variability [LO1]

Worksheet

Learning Objective: 10-01 Calculate the

return on an investment.

Problem 10-19 Calculating Returns and Variability [LO1]

You find a certain stock that had returns of 12.8 percent, 21.4 percent, 27.4 percent, and 18.4 percent for
four of the last five years. Assume the average return of the stock over this period was 10.80 percent.
Requirement 1:
What was the stocks return for the missing year? (Do not round intermediate calculations. Enter your
answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Stock's return

16.80 1%
%

Requirement 2:
What is the standard deviation of the stocks returns? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Standard deviation

18.78 1%
%

Explanation:

Here, we know the average stock return, and four of the five returns used to compute the average return.
We can work the average return equation backward to find the missing return. The average return is
calculated as:
.1080 = (.128 .214 + .274 + .184 + R) / 5
.54 = .128 .214 + .274 + .184 + R
R = .1680, or 16.80%
The missing return has to be 16.80 percent. Now we can use the equation for the variance to find:
Variance = 1/4[(.128 .1080)2 + (.214 .1080)2 + (.274 .1080)2 + (.184 .1080)2 + (.168 .1080)2]
Variance = .035254
And the standard deviation is:
Standard deviation = (.035254)1/2 = .1878, or 18.78%

8.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-20 Arithmetic and Geometric Returns [LO 1]

A stock has had returns of 18.2 percent, 28.2 percent, 14.4 percent, 9.3 percent, 34.0 percent, and 26.2
percent over the last six years.
Required:
What are the arithmetic and geometric returns for the stock? (Do not round intermediate calculations.
Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Arithmetic average return
Geometric average return

12.55
10.70

%
%

Problem 10-20 Arithmetic and Geometric

Returns [LO 1]

Worksheet

Learning Objective: 10-01 Calculate the

return on an investment.

Problem 10-20 Arithmetic and Geometric Returns [LO 1]

A stock has had returns of 18.2 percent, 28.2 percent, 14.4 percent, 9.3 percent, 34.0 percent, and 26.2
percent over the last six years.
Required:
What are the arithmetic and geometric returns for the stock? (Do not round intermediate calculations.
Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Arithmetic average return
Geometric average return

12.55 1% %
10.70 1% %

Explanation:

The arithmetic average return is the sum of the known returns divided by the number of returns, so:
Arithmetic average return = (.182 + .282 + .144 .093 + .340 +.262) / 6
Arithmetic average return = .1255, or 12.55%
Using the equation for the geometric return, we find:
Geometric average return = [(1 + R1) (1 + R2) (1 + RT)]1/T 1
Geometric average return = [(1 .182)(1 + .282)(1 + .144)(1 .093)(1 + .340)(1 + .262)](1/6) 1
Geometric average return = .1070, or 10.70%
Remember, the geometric average return will always be less than the arithmetic average return if the
returns have any variation.

9.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-22 Calculating Returns [LO 2,3]

Consider the following table for an eight-year period:
Year
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

T-bill return
7.45%
8.84
6.03
5.87
5.61
8.44
10.72
12.90

Inflation
8.55%
12.18
6.78
5.02
6.54
8.86
13.13
12.36

Requirement 1:
Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index)

for this period. (Do not round intermediate calculations. Enter your answers as a percentage rounded
to 2 decimal places (e.g., 32.16).)
Average return for Treasury bills
Average annual inflation rate

8.23
9.18

%
%

Requirement 2:
Calculate the standard deviation of Treasury bill returns and inflation over this time period. (Do not round
intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g.,
32.16).)
Standard deviation of Treasury bills
Standard deviation of inflation

2.57
3.05

%
%

Requirement 3:
(a) Calculate the real return for each year. (Negative amounts should be indicated by a minus
sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate
calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Year
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

Real return
-1.01
-2.98
-0.70
0.81
-0.87
-0.39
-2.13
0.48

%
%
%
%
%
%
%
%

(b) What is the average real return for Treasury bills? (Negative amount should be indicated by a minus
sign. Do not round intermediate calculations. Enter your answer as a percentage
rounded to 2 decimal places (e.g., 32.16).)
Average real return for Treasury bills

-0.85

Worksheet

Learning Objective: 10-02 Discuss the

historical returns on various important types
of investments.

Problem 10-22 Calculating Returns [LO 2,3]

Learning Objective: 10-03 Explain the

historical risks on various important types of
investments.

Problem 10-22 Calculating Returns [LO 2,3]

Consider the following table for an eight-year period:
Year
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

T-bill return
7.45%
8.84
6.03
5.87
5.61
8.44
10.72
12.90

Inflation
8.55%
12.18
6.78
5.02
6.54
8.86
13.13
12.36

Requirement 1:
Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index)
for this period. (Do not round intermediate calculations. Enter your answers as a percentage rounded
to 2 decimal places (e.g., 32.16).)
Average return for Treasury bills
Average annual inflation rate

8.23 1% %
9.18 1% %

Requirement 2:
Calculate the standard deviation of Treasury bill returns and inflation over this time period. (Do not round
intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g.,
32.16).)
Standard deviation of Treasury bills

2.57 1% %

3.05 1% %

Standard deviation of inflation

Requirement 3:
(a) Calculate the real return for each year. (Negative amounts should be indicated by a minus
sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate
calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Year
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

Real return
-1.01 0.01
-2.98 0.01
-0.70 0.01
0.81 0.01
-0.87 0.01
-0.39 0.01
-2.13 0.01
0.48 0.01

%
%
%
%
%
%
%
%

(b) What is the average real return for Treasury bills? (Negative amount should be indicated by a minus
sign. Do not round intermediate calculations. Enter your answer as a percentage
rounded to 2 decimal places (e.g., 32.16).)
Average real return for Treasury bills

-0.85 0.01 %

Explanation:

To find the real return we need to use the Fisher equation. Re-writing the Fisher equation to solve for the
real return, we get:
r = [(1 + R)/(1 + h)] 1
So, the real return each year was:
Year
T-bill return Inflation
Year 1
.0745
.0855
Year 2
.0884
.1218
Year 3
.0603
.0678
Year 4
.0587
.0502
Year 5
.0561
.0654
Year 6
.0844
.0886
Year 7
.1072
.1313
Year 8
.1290
.1236
.6586

Real return
.0101
.0298
.0070
.0081
.0087
.0039
.0213
.0048

.7342

.0679

1:
The average return for T-bills over this period was:
Average return = .6586 / 8
Average return = .0823, or 8.23%
And the average inflation rate was:
Average inflation = .7342 / 8
Average inflation = .0918, or 9.18%
2:
Using the equation for variance, we find the variance for T-bills over this period was:
Variance = 1/7[(.0745 .0823)2 + (.0884 .0823)2 + (.0603 .0823)2 + (.0587 .0823)2 +
(.0561 .0823)2+ (.0844 .0823)2 + (.1072 .0823)2 + (.1290 .0823)2]
Variance = .000662
And the standard deviation for T-bills was:
Standard deviation = (.000662)1/2
Standard deviation = .0257, or 2.57%
The variance of inflation over this period was:

Variance = 1/7[(.0855 .0918)2 + (.1218 .0918)2 + (.0678 .0918)2 + (.0502 .0918)2 +

(.0654 .0918)2 + (.0886 .0918)2 + (.1313 .0918)2 + (.1236 .0918)2]
Variance = .000932
And the standard deviation of inflation was:
Standard deviation = (.000932)1/2
Standard deviation = .0305, or 3.05%
3:
The average observed real return over this period was:
Average observed real return = .0679 / 8
Average observed real return = .0085, or .85%

10.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-3 Calculating Dollar Returns [LO 1]

You purchased 330 shares of a particular stock at the beginning of the year at a price of $75.93. The stock
paid a dividend of $1.25 per share, and the stock price at the end of the year was $82.44.
Required:
What was your dollar return on this investment? (Do not round intermediate calculations. Round your
answer to 2 decimal places (e.g., 32.16).)
Dollar return

$ 2,560.80

Problem 10-3 Calculating Dollar Returns [LO Learning Objective: 10-01 Calculate the
1]
return on an investment.

Worksheet

Problem 10-3 Calculating Dollar Returns [LO 1]

You purchased 330 shares of a particular stock at the beginning of the year at a price of $75.93. The stock
paid a dividend of $1.25 per share, and the stock price at the end of the year was $82.44.
Required:
What was your dollar return on this investment? (Do not round intermediate calculations. Round your
answer to 2 decimal places (e.g., 32.16).)
Dollar return

2,560.80 .1%

Explanation:

To calculate the dollar return, we multiply the number of shares owned by the change in price per share
and the dividend per share received. The total dollar return is:
Dollar return = 330($82.44 75.93 + 1.25)
Dollar return = $2,560.80

11.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-5 Nominal versus Real Returns [LO 2]

Consider the following information on large-company stocks for a period of years.
Series
Large-company stocks
Small-company stocks
Long-term corporate bonds
Long-term government bonds

Arithmetic Mean
12.7%
16.4
6.2
6.1

Intermediate-term government
bonds
U.S. Treasury bills
Inflation

5.6
3.8
3.3

Required:
(a) What was the arithmetic average annual return on large-company stocks in nominal terms? (Do not
round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Nominal return

12.70

(b) What was the arithmetic average annual return on large-company stocks in real terms? (Do not round
intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g.,
32.16).)
Real return

Worksheet

9.10

Problem 10-5 Nominal versus Real Returns

[LO 2]

Learning Objective: 10-02 Discuss the

historical returns on various important types
of investments.

Problem 10-5 Nominal versus Real Returns [LO 2]

Consider the following information on large-company stocks for a period of years.
Series
Large-company stocks
Small-company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government
bonds
U.S. Treasury bills
Inflation

Arithmetic Mean
12.7%
16.4
6.2
6.1
5.6
3.8
3.3

Required:
(a) What was the arithmetic average annual return on large-company stocks in nominal terms? (Do not
round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Nominal return

12.70 1% %

(b) What was the arithmetic average annual return on large-company stocks in real terms? (Do not round
intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g.,
32.16).)
Real return

9.10 1% %

Explanation:

(a)
The nominal return is the stated return, which is 12.7 percent.
(b)
Using the Fisher equation, the real return was:
(1 + R) = (1 + r)(1 + h)
r = (1.1270) / (1.033) 1
r = .0910, or 9.10%

12.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-6 Bond Returns [LO 2]

Consider the following information for a period of years.
Series
Large-company stocks
Small-company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Inflation

Arithmetic Mean
11.7 %
16.4
6.7
6.6
5.6
3.8
3.3

Requirement 1:
What is the real return on long-term government bonds? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Real return

3.20

Requirement 2:
What is the real return on long-term corporate bonds? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Real return

3.29

Worksheet

Problem 10-6 Bond Returns [LO 2]

Learning Objective: 10-02 Discuss the

historical returns on various important types
of investments.

Problem 10-6 Bond Returns [LO 2]

Consider the following information for a period of years.
Series
Large-company stocks
Small-company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Inflation

Arithmetic Mean
11.7 %
16.4
6.7
6.6
5.6
3.8
3.3

Requirement 1:
What is the real return on long-term government bonds? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Real return

3.19 1% %

Requirement 2:
What is the real return on long-term corporate bonds? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Real return

3.29 1% %

Explanation:

Using the Fisher equation, the real returns for government and corporate bonds were:
(1 + R) = (1 + r)(1 + h)
1:
rG = 1.066 / 1.033 1
rG = .0319, or 3.19%
2:
rC = 1.067 / 1.033 1
rC = .0329, or 3.29%

13.

award:

1 out of
1.00 point
You received credit for this question in a previous attempt

Problem 10-17 Return Distributions [LO 3]

Consider the following table for the total annual returns for a given period of time.
Series
Large-company stocks
Small-company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Inflation

Average return
11.7 %
16.4
6.3
6.1
5.6
3.8
3.1

Standard Deviation
20.6%
33.0
9.6
9.4
5.7
3.1
4.2

Requirement 1:
What range of returns would you expect to see 95 percent of the time for long-term corporate bonds?
(Negative amount should be indicated by a minus sign. Input your answers from lowest to highest
to receive credit for your answers. Do not round intermediate calculations. Enter your answers as a
percentage rounded to 2 decimal places (e.g., 32.16).)
Expected range of returns

-12.90

% to 25.30

Requirement 2:
What about 99 percent of the time? (Negative amount should be indicated by a minus sign. Input
your answers from lowest to highest to receive credit for your answers. Do not round intermediate
calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Expected range of returns

-22.50

Worksheet

% to 35.10

Problem 10-17 Return Distributions [LO 3]

Learning Objective: 10-03 Explain the

historical risks on various important types of
investments.

Problem 10-17 Return Distributions [LO 3]

Consider the following table for the total annual returns for a given period of time.
Series
Large-company stocks
Small-company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Inflation

Average return
11.7 %
16.4
6.3
6.1
5.6
3.8
3.1

Standard Deviation
20.6%
33.0
9.6
9.4
5.7
3.1
4.2

Requirement 1:
What range of returns would you expect to see 95 percent of the time for long-term corporate bonds?
(Negative amount should be indicated by a minus sign. Input your answers from lowest to highest
to receive credit for your answers. Do not round intermediate calculations. Enter your answers as a
percentage rounded to 2 decimal places (e.g., 32.16).)
Expected range of
returns

-12.90 1% % to

25.50 1% %

Requirement 2:
What about 99 percent of the time? (Negative amount should be indicated by a minus sign. Input
your answers from lowest to highest to receive credit for your answers. Do not round intermediate
calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Expected range of
returns

-22.50 1% % to

35.10 1% %

Explanation:

Looking at the long-term corporate bond return history, we see that the mean return was 6.3 percent, with
a standard deviation of 9.6 percent. The range of returns you would expect to see 95 percent of the time is

the mean plus or minus 2 standard deviations, or:

R 2 = 6.3% 2(9.6%) = 12.90% to 25.50%
The range of returns you would expect to see 99 percent of the time is the mean plus or minus 3 standard
deviations, or:
R 3 = 6.3% 3(9.6%) = 22.50% to 35.10%

14.

award:

0 out of
1.00 point
You did not receive credit for this question in a previous attempt

Problem 10-23 Calculating Investment Returns [LO 1]

You bought one of Rocky Mountain Manufacturing Co.s 8.25 percent coupon bonds one year ago for
$1,045.80. These bonds make annual payments and mature ten years from now. Suppose that you decide
to sell your bonds today, when the required return on the bonds is 7.75 percent.
Required:
If the inflation rate was 3.6 percent over the past year, what would be your total real return on investment?
(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Total real return on investment

Worksheet

n/r

Problem 10-23 Calculating Investment

Returns [LO 1]

Learning Objective: 10-01 Calculate the

return on an investment.

Problem 10-23 Calculating Investment Returns [LO 1]

You bought one of Rocky Mountain Manufacturing Co.s 8.25 percent coupon bonds one year ago for
$1,045.80. These bonds make annual payments and mature ten years from now. Suppose that you decide
to sell your bonds today, when the required return on the bonds is 7.75 percent.
Required:
If the inflation rate was 3.6 percent over the past year, what would be your total real return on investment?
(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2
decimal places (e.g., 32.16).)
Total real return on investment

3.04 1% %

Explanation:

To find the return on the coupon bond, we first need to find the price of the bond today. Since the bond has
10 years to maturity, the price today is:
P1 = $82.50(PVIFA7.75%,10) + $1,000 / 1.077510
P1 = $1,033.93
You received the coupon payments on the bond, so the nominal return was:
R = ($1,033.93 1,045.80 + 82.50) / $1,045.80
R = .0675, or 6.75%
And using the Fisher equation to find the real return, we get:
r = (1.0675 / 1.036) 1
r = 0.0304, or 3.04%