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3 long answer questions
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Assignment 5
Text edition 7:
Chapter 12 – Questions and Problems – 5, 7, 8, 9, 12, 13.
5. Nominal versus Real Returns:
a. In nominal terms?
b. In real terms?
The nominal return is 10.23% from the table.
To find the real return, we use the fisher equation
(1 + R) = (1 + r) (1 + h)
(1 + 0.1023) = (1 + r) (1 + 0.0406)
1.1023 = (1 + r) (1.0406)
1 + r = 1.0593
r = 1.0593 – 1
r = 0.0593 or 5.93%
7. Calculating Returns and Variability:
Returns
Year X Y
1 6% 18%
2 24 39
3 13 -6
4 -14 -20
5 15 47
Return X
Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5]/N
= [0.06 + 0.24 + 0.13 – 0.14 + 0.15]/5
= 0.44/5
= 0.088 or 8.80%
Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2]
= 1/ (5 – 1) [(0.06 – 0.088)2 + (0.24 – 0.088)2 + (0.13 – 0.088)2 + (-0.14 – 0.088)2+ (0.15 – 0.088)2]
= ¼ [0.08148]
= 0.02037
Standard deviation = vVariance
= v0.02037
= 0.1427 or 14.27%
Return Y
Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5]/N
= [0.18 + 0.39 + (-0.06) + (-0.20) + 0.47]/5
= 0.78/5
= 0.1560 or 15.60%
Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2]
= 1/ (5 – 1) [(0.18 – 0.156)2 + (0.39 – 0.156)2 + (-0.06 – 0.156)2 + (-0.20 – 0.156)2+ (0.47 – 0.156)2]
= ¼ [0.32732]
= 0.08183
Standard deviation = vVariance
= v0.08183
= 0.2861 or 28.61%
8. Risk Premiums:
a. Calculate the…
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