FINC300 ASSINMENT 5: Complete the following homework questions in Word or Excel, as applicable. Clearly label your response and organize your work. Save your file as “LastnameFirstinitial-FINC300-5.”
1. (Calculating rates of return) On December 24, 2013, the common stock of Apple Inc. (APPL) was trading for $700.73. One year later the shares sold for only $298.02. APPL has never paid a common stock dividend. What rate of return would you have earned on your investment had you purchased the shares on December 24, 2007?
2. (Expected rate of return and risk) Potts Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.9 percent. Calculate the following investment’s expected return and its standard deviation. Should Potts invest in this security?
|
Probability |
Return |
|
0.15 |
3% |
|
0.3 |
2% |
|
0.4 |
4% |
|
0.15 |
6% |
3. (Expected rate of return) Robert Gage is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to Robert that the fund’s performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes:
|
State of the Economy |
Probability |
Fund Return |
|
Rapid expansion and recovery |
5% |
100% |
|
Modest growth |
45% |
35% |
|
Continued recession |
45% |
5% |
|
Falls into depression |
5% |
–100% |
Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
Calculate the standard deviation