Description
4 questions
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Explanation & Answer
Kindly see attached files with the answer to the different questionsI've included both a pdf and a doc version so that you can use any of them if you can't read the equations used in the calculation of the different variables
Problem 1.
Average rates of return for each year taking into account the stock price from the previous year:
π΄π
π
(π πππππ π¦πππ) = 9 β 12 = β$3
π΄π
π
(π‘βπππ π¦πππ) = 7 β 9 = β$2
π΄π
π
(πππ’ππ‘β π¦πππ) = 6 β 7 = β$1
π΄π
π
(ππππ‘β π¦πππ) = 8 β 6 = $2
Annual rates of return:
π΄π
π
(π πππππ π¦πππ) =
π΄π
π
(π‘βπππ π¦πππ) =
7β9
= β0.22
9
π΄π
π
(πππ’ππ‘β π¦πππ) =
π΄π
π
(ππππ‘β π¦πππ) =
9 β 12
= β0.25
12
6β7
= β0.14
7
8β6
= 0.33
6
Arithmetic average rate of return over the 5-year period:
π΄πππ‘βπππ‘ππ π΄π
π
=
(β0.25) + (β0.22) + (β0.14) + 0.33
= β0.0704 = β7.04%
4
Geometric average rate of return over the 5-year period:
4
πΊπππππ‘πππ π΄π
π
= (β(1 β 0.25) β (1 β 0.22) β (1 β 0.14) β (1 + 0.33) β 1) = β0.0964 = β9.64%
Analysis:
The geometric average rate of return provides a better approximation to the annual rate of return over the
considered period as it takes into account the compounding effect of interest rates.
Annual rate of return for the third year:
π΄π
π
(π‘βπππ π¦πππ) =
7β9
= β0.22 = β22%
9
Problem 2.
π΄π£πππππ πποΏ½...