# Finc 600 week3 assignment 36090

[removed]Instructions
NAME:
To complete the homework assignments in the templates provided:
1. The question is provided for each problem. You may need to refer to your textbook for additional information in
a few cases.
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a) T requires a text answer. Essay questions require references; use the textbook.

#### How many pages is this assigment?

b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator
and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show
in the cell. I will be able to review your calculation and correct, if necessary.
c) F requires a number only. In some problems, a Step 1 is added to help you solve the problem.
d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/
(1+inflation)]-1, or D (debt) + E (equity) = V (value).
4. Name your assignment file as &quot;lastnamefirstinitial-FINC600-Week#&quot;, and submit by midnight ET, Day 7.

Problem 7-2
The following table shows the nominal returns on U.S. Stocks and the rate of inflation:

Year
2004
2005
2006
2007
2008

Nominal Return
(%)
12.5
6.4
15.8
5.6
-37.2

Inflation (%)
3.3
3.4
2.5
4.1
0.1

a)What was the standard deviation of the market returns?
b)Calculate the average real return.

a)What was the standard deviation of the market returns?
Find the standard deviation by completing the table with the appropriate formulas
Year
2004
2005
2006
2007
2008
Total 2004-2008
Average
Std. Deviation

Nominal Return
(%)
12.5
6.4
15.8
5.6
-37.2

Difference from
Average
C
C
C
C
C

Squared
Difference
C
C
C
C
C

C
C

C
C
C

TIP: Click on the cell for
directions

Use SQRT function for this answer only

b)Calculate the average real return.
Find the average real return by completing the table with the appropriate formulas
Year
2004
2005
2006
2007
2008
Average

Nominal Return
(%)
12.5
6.4
15.8
5.6
-37.2

Inflation (%)
3.3
3.4
2.5
4.1
0.1

Real Return (%) TIP: Click on the cell for
directions
C
C
C
C
C
C

Problem 7-11

Each of the following statements is dangerous or misleading. Explain why.
a. A long-term United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.

a.

T

b.

T

c.

T

Problem 8-6
Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at
10%. Use the betas in Table 8.2 (p. 193) – also provided below.
a. Calculate the expected return from Dell.
b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the
expected market return stays at 10%.
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
Formula
Rf + (Beta (Rm – Rf))

A. Dell’s expected return

Calculation
C

B./C.
Stock

Beta (B)

Amazon
Ford
Dell
Starbucks
Boeing
Disney
Newmont
Exxon Mobil
Johnson &amp; Johnson
Campbell Soup
B. Highest
C. Lowest

2.16
1.75
1.41
1.16
1.14
0.96
0.63
0.55
0.5
0.3

Revised T Bill
Risk-Free Rate

Market
Return

Expected
return

D. FORD will offer a ________ expected return at 6%.
Interest rate
4%
6%
C
Rate of return
C

Higher or lower?

E. Exxon will offer a _______ expected return at 8%.
Interest rate
4%
8%
Rate of return
C
C

Higher or lower?

Principles of Corporate Finance, Concise, 2nd Edition

Problem 8-18
Some true or false questions about the APT:
a. The APT factors cannot reflect diversifiable risks.
b. The market rate of return cannot be an APT factor.
c. There is no theory that specifically identifies the APT factors.
could be true but not very useful, for example, if the relevant factors change unpredictably.
Respond to each question – true or false – and why.