After graduating from college last spring with a major in accounting and finance, Jim Hale took a job as an analyst trainee for an investment company in Chicago. His first few weeks were filled with a series of rotations throughout the firm’s various operating units, but this week he was assigned to one of the firm’s traders as an analyst. On his first day Jim’s boss called him in and told him that he wanted to do some rudimentary analysis of the investment returns of a semiconductor manufacturer called advanced Micro Devices, Inc. (AMD). Specifically, Jim was given the following month-end closing prices for the company spanning the January 2, 2015 through December 31, 2015: Date Closing Price Date Closing Price 2-Jan-15 $7.14 3-Aug-15 $4.28 2-Feb-15 $8.00 1-Sep-15 $6.34 2-Mar-15 $6.76 1-Oct-15 $4.74 1-Apr-15 $6.07 2-Nov-15 $3.61 1-May-15 $6.22 1-Dec-15 $2.00 1-Jun-15 $6.80 31-Dec-15 $2.18 1-Jul-15 $5.65 He was then instructed by his boss to complete the following tasks using the AMD price data (note that AMD paid no dividend during 2015). Questions 1. Compute the monthly realized rates of return earned by AMD for the entire year. 2. Calculate the average monthly rate of return for AMD using for the arithmetic and geometric averages. 3. Calculate the year-end price for AMD, computing the compound value of the beginning-of-year price of $7.14 per share for 12 months at the monthly geometric average rate of return calculated earlier: End-of-Year Stock Price = Beginning-of-Year Stock Price (1 + Geometric Average Monthly Rate of Return) 4. Compute the annual rate of return for AMD using the beginning stock price for the period and the ending price (i.e., $7.14 and $2.18). 5. Now calculate the annual rate of return using the geometric average monthly rate of return using the following relationship: Compound Annual Rate of Return = (1 + Geometric Avg. Monthly Rate of Return) 12 – 1 6. If you were given annual rate of return data for AMD or any other company’s stock and you were asked to estimate the average annual rate of return an investor would have earned over the sample period by holding the stock, would you use arithmetic or geometric average of the historical rates of return? Explain your response as if you were talking to a client who has had no formal training in finance or investments.

Answer rating: 100% (QA)

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