P12-2

1. From the information below, compute the average annual return,

the variance, standard deviation, and coefficient of variation for

each asset.

ASSET ANNUAL RETURNS

A 5%, 10%, 15%, 4%

B 6%, 20%, 2%, 5%, 10%

C 12%, 15%, 17%

D 10%, 10%, 20%, 15%, 8%, 7%

2. Based upon your answers to question 1, which asset appears riskiest

based on standard deviation? Based on coefficient of variation?

P12-5

5. RCMP, Inc. shares rose 10 percent in value last year while the

inflation rate was 3.5 percent. What was the real return on the stock?

If an investor sold the stock after one year and paid taxes on the

investment at a 15 percent tax rate, what is the real after-tax return

on the investment?

P12-10

10. Given her evaluation of current economic conditions, Ima

Nutt believes there is a 20 percent probability of recession, a 50

percent chance of continued steady growth, and a 30 percent

probability of inflationary growth. For each possibility, Ima has

developed an interest rate forecast for long-term Treasury bond

interest rates:

ECONOMIC INTEREST RATE

FORECAST FORECAST

Recession 6 percent

Constant growth 9 percent

Inflation 14 percent

a. What is the expected interest rate under Ima