(Solving a comprehensive problem) Use the end-of-year stock price data in the popup window, to answer...
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(Solving a comprehensive problem) Use the end-of-year stock price data in the popup window, to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of return from part a. (Note: you may assume that neither firm pays any dividends.) c. Compute a three-year rate of return spanning the entire period (i.e., using the ending price for period 1 and ending price for period 4). d. Since the rate of return calculated in part c is a three-year rate of return, convert it to an annual rate of return by using the following equation: 3 1+ Three-Year Rate of Return 1+ Annual Rate of Return e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are evaluating the performance of an investment that has been held for several years, what type of average rate of return (arithmetic or geometric) should you use? Why? Time a. Enter the annual rate of return for each year for Harris in the table below. (Round to two decimal places.) Value of Harris Stock Annual Rate of Return Value of Pinwheel Stock Annual Rate of Return 1 $11 $20 2 7 % 32 3 14 % 29 4 14 % 22 26 (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability 0.35 0.30 0.35 Return Probability 10% 0.15 16% 0.35 21% 0.35 0.15 Return -4% 7% 16% 20% (Click on the icon in order to copy its contents into a spreadsheet.) a. Given the information in the table, the expected rate of return for stock A is %. (Round to two decimal places.) (Related to Checkpoint 6.1) (Future value of an annuity) Imagine that Homer Simpson actually invested the $100,000 he earned providing Mr. Burns entertainment 5 years ago at 11.5 percent annual interest and that he starts investing an additional $2,500 a year today and at the beginning of each year for 10 years at the same 11.5 percent annual rate. How much money will Homer have 10 years from today? The amount of money Homer will have 10 years from now is $ (Round to the nearest cent.) (Solving a comprehensive problem) Use the end-of-year stock price data in the popup window, to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of return from part a. (Note: you may assume that neither firm pays any dividends.) c. Compute a three-year rate of return spanning the entire period (i.e., using the ending price for period 1 and ending price for period 4). d. Since the rate of return calculated in part c is a three-year rate of return, convert it to an annual rate of return by using the following equation: 3 1+ Three-Year Rate of Return 1+ Annual Rate of Return e. How is the annual rate of return calculated in part d related to the geometric rate of return? When you are evaluating the performance of an investment that has been held for several years, what type of average rate of return (arithmetic or geometric) should you use? Why? Time a. Enter the annual rate of return for each year for Harris in the table below. (Round to two decimal places.) Value of Harris Stock Annual Rate of Return Value of Pinwheel Stock Annual Rate of Return 1 $11 $20 2 7 % 32 3 14 % 29 4 14 % 22 26 (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability 0.35 0.30 0.35 Return Probability 10% 0.15 16% 0.35 21% 0.35 0.15 Return -4% 7% 16% 20% (Click on the icon in order to copy its contents into a spreadsheet.) a. Given the information in the table, the expected rate of return for stock A is %. (Round to two decimal places.) (Related to Checkpoint 6.1) (Future value of an annuity) Imagine that Homer Simpson actually invested the $100,000 he earned providing Mr. Burns entertainment 5 years ago at 11.5 percent annual interest and that he starts investing an additional $2,500 a year today and at the beginning of each year for 10 years at the same 11.5 percent annual rate. How much money will Homer have 10 years from today? The amount of money Homer will have 10 years from now is $ (Round to the nearest cent.)
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