Chapter 3 Questions

Question 1

The following table lists the stock prices for Microsoft from 1989 to 1998. The company did not pay any dividends during the period
Year Price (dollars)
1989 1.20
1990 2.09
1991 4.64
1992 5.34
1993 5.05
1994 7.64
1995 10.97
1996 20.66
1997 32.31
1998 69.34
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Microsoft today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 2

Unicom is a regulated utility serving Northern Illinois. The following table lists the stock prices and dividends on Unicom from 1989 to 1998.
Year      Price (dollars)    Dividends (dollars)
1989     36.10                  3.00
1990     33.60                   3.00
1991     37.80                   3.00
1992     30.90                   2.30
1993     26.80                   1.60
1994     24.80                   1.60
1995     31.60                   1.60
1996     28.50                   1.60
1997     24.25                   1.60
1998     35.60                   1.60
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Unicom today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 11

Every investor in the capital asset pricing model owns a combination of the market portfolio and a riskless asset. Assume that the standard deviation of the market portfolio is 30% and that the expected return on the portfolio is 15%. What proportion of the following investor’s wealth would you suggest investing in the market portfolio and what proportion in the riskless asset? (The riskless asset has an expected return of 5%)
a. An investor who desires a portfolio with no standard deviation.
b. An investor who desires a portfolio with a standard deviation of 15%.
c. An investor who desires a portfolio with a standard deviation of 30%.
d. An investor who desires a portfolio with a standard deviation of 45%.
e. An investor who desires a portfolio with an expected return of 12%.

References

Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.

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Chapter 3 Questions

Select three formula-driven-problems from the Chapter 3 that you wish to show case and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.

Chapter 3 Questions

Question 1

The following table lists the stock prices for Microsoftfrom 1989 to 1998. The company did not pay any dividends during the period
Year Price (dollars)
1989 1.20
1990 2.09
1991 4.64
1992 5.34
1993 5.05
1994 7.64
1995 10.97
1996 20.66
1997 32.31
1998 69.34
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Microsoft today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 2

Unicom is a regulated utility serving Northern Illinois. The following table lists the stock prices and dividends on Unicom from 1989 to 1998.
Year      Price (dollars)    Dividends (dollars)
1989     36.10                  3.00
1990     33.60                   3.00
1991     37.80                   3.00
1992     30.90                   2.30
1993     26.80                   1.60
1994     24.80                   1.60
1995     31.60                   1.60
1996     28.50                   1.60
1997     24.25                   1.60
1998     35.60                   1.60
a. Estimate the average annual return you would have made on your investment.
b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Unicom today, would you expect the historical standard deviations and variances to continue to hold? Why or why not?

Question 11

Every investor in the capital asset pricing model owns a combination of the market portfolio and a riskless asset. Assume that the standard deviation of the market portfolio is 30% and that the expected return on the portfolio is 15%. What proportion of the following investor’s wealth would you suggest investing in the market portfolio and what proportion in the riskless asset? (The riskless asset has an expected return of 5%)
a. An investor who desires a portfolio with no standard deviation.
b. An investor who desires a portfolio with a standard deviation of 15%.
c. An investor who desires a portfolio with a standard deviation of 30%.
d. An investor who desires a portfolio with a standard deviation of 45%.
e. An investor who desires a portfolio with an expected return of 12%.