Chapter 3 Questions

Chapter 3 Questions

Chapter 3 Questions

Question 1

The following table lists the stock prices for Microsoft from 1989 to 1998. The company did not pay any dividends during the period
Year Price (dollars)
1989 1.20
1990 2.09
1991 4.64
1992 5.34
1993 5.05
1994 7.64
1995 10.97
1996 20.66
1997 32.31
1998 69.34
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Microsoft today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 1
Year Price Return %Return R-AR %(R-AR) %(R-AR) SQUARED
1989 1.2 0 0 0 0
1990 2.09 0.741666667 74.16666667 11.94058893 0.119405889 0.014257766
1991 4.64 1.220095694 122.0095694 59.78349164 0.597834916 0.357406587
1992 5.34 0.150862069 15.0862069 -47.13987084 -0.471398708 0.222216742
1993 5.05 -0.054307116 -5.43071161 -67.66 -0.6766 0.45778756
1994 7.64 0.512871287 51.28712871 -10.93894903 -0.10938949 0.011966061
1995 10.97 0.435863874 43.58638743 -18.6396903 -0.186396903 0.034743805
1996 20.66 0.88331814 88.33181404 26.1057363 0.261057363 0.068150947
1997 32.31 0.563891578 56.38915779 -5.836919947 -0.058369199 0.003406963
1998 69.34 1.146084803 114.6084803 52.38240261 0.523824026 0.27439161
159.24 1592.4 560.0346997 560.0346997 5.600346997 1.444328043
62.22607774
Variance 0.180541005
Standard Deviation 0.424901171

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Question 2

Unicom is a regulated utility serving Northern Illinois. The following table lists Unicom’s stock prices and dividends from 1989 to 1998.
Year      Price (dollars)    Dividends (dollars)
1989     36.10                  3.00
1990     33.60                   3.00
1991     37.80                   3.00
1992     30.90                   2.30
1993     26.80                   1.60
1994     24.80                   1.60
1995     31.60                   1.60
1996     28.50                   1.60
1997     24.25                   1.60
1998     35.60                   1.60
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Unicom today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 2 
Year Price Dividends Annual Returns Deviation= Annual Return -Average Annual Return Deviation Squared
1989 36.1 3 0.083102493 0.01629239 0.000265442
1990 33.6 3 0.089285714 0.089285714 0.007971939
1991 37.8 3 0.079365079 0.079365079 0.006298816
1992 30.9 2.3 0.074433657 0.074433657 0.005540369
1993 26.8 1.6 0.059701493 0.059701493 0.003564268
1994 24.8 1.6 0.064516129 0.064516129 0.004162331
1995 31.6 1.6 0.050632911 0.050632911 0.002563692
1996 28.5 1.6 0.056140351 0.056140351 0.003151739
1997 24.25 1.6 0.065979381 0.065979381 0.004353279
1998 35.6 1.6 0.04494382 0.04494382 0.002019947
0.066810103 0.601290926 0.003989182
STANDARD DEVIATION (Square root Variance) 0.063159973

Question 11

Every capital asset pricing model investor owns a combination of the market portfolio and a riskless asset. Assume that the standard deviation of the market portfolio is 30% and the expected return on the portfolio is 15%. What proportion of the following investor’s wealth would you suggest investing in the market portfolio, and what proportion in the riskless asset? (The riskless asset has an expected return of 5%)
a. An investor who desires a portfolio with no standard deviation.
b. An investor who desires a portfolio with a standard deviation of 15%.
c. An investor who desires a portfolio with a standard deviation of 30%.
d. An investor who desires a portfolio with a standard deviation of 45%.
e. An investor who desires a portfolio with an expected return of 12%.

Question 11
A Portfolio with no standard deviation in the market portfolio 0% 15% 0%
Proportion in the riskless asset 1 0% 100%
B Portfolio with a standard deviation of 15% in the market portfolio 15% 15% 100%
Proportion in the riskless asset 1 100% 0%
C Portfolio with a standard deviation of 30% in the market portfolio 30% 15% 200%
Proportion in the riskless asset 1 200% -100%
D Portfolio with a standard deviation of 45% proportion of the market portfolio 45% 15% 300%
Proportion in the riskless asset 1 300% -200%
E Portfolio with an expected return of 12% 12% 15% 80.0%

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References

Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.

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Question 


Chapter 3 Questions

Select three formula-driven problems from Chapter 3 that you wish to showcase and prepare a Microsoft Excel document showing the formulas used to prepare the solution for those problems.

Chapter 3 Questions

Chapter 3 Questions

Question 1

The following table lists the stock prices for Microsoft from 1989 to 1998. The company did not pay any dividends during the period
Year Price (dollars)
1989 1.20
1990 2.09
1991 4.64
1992 5.34
1993 5.05
1994 7.64
1995 10.97
1996 20.66
1997 32.31
1998 69.34
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Microsoft today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 2

Unicom is a regulated utility serving Northern Illinois. The following table lists Unicom’s stock prices and dividends from 1989 to 1998.
Year      Price (dollars)    Dividends (dollars)
1989     36.10                  3.00
1990     33.60                   3.00
1991     37.80                   3.00
1992     30.90                   2.30
1993     26.80                   1.60
1994     24.80                   1.60
1995     31.60                   1.60
1996     28.50                   1.60
1997     24.25                   1.60
1998     35.60                   1.60
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Unicom today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 11

Every capital asset pricing model investor owns a combination of the market portfolio and a riskless asset. Assume that the standard deviation of the market portfolio is 30% and the expected return on the portfolio is 15%. What proportion of the following investor’s wealth would you suggest investing in the market portfolio, and what proportion in the riskless asset? (The riskless asset has an expected return of 5%)
a. An investor who desires a portfolio with no standard deviation.
b. An investor who desires a portfolio with a standard deviation of 15%.
c. An investor who desires a portfolio with a standard deviation of 30%.
d. An investor who desires a portfolio with a standard deviation of 45%.
e. An investor who desires a portfolio with an expected return of 12%.

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