(Calculating rates of return) The S&P stock index represents a portfolio compris
ID: 2738710 • Letter: #
Question
(Calculating rates of return)
The S&P stock index represents a portfolio comprised of 500 large publicly traded companies. On December 24, 2007, the index had a value of 1,410 and on December 24, 2008, the index was approximately 925. If the average dividend paid on the stocks in the index is approximately 4.5 percent of the value of the index at the beginning of the year, what is the rate of return earned on the S&P index? What is your assessment of the relative riskiness of investing in a single stock such as Google compared to investing in the S&P index?
A) The rate of return earned on the S&P 500 is ________%. (Round to two decimal places.)
B) What is your assessment of the relative riskiness of investing in a single stock, such as Google, compared to investing in the S&P index? (Select the best choice below.)
A. In general, investing in the S&P index is riskier than investing in a single stock.
B. In general, investing in a single stock is riskier than investing in the S&P index.
C. There is not enough information given to answer this question.
D. In general, investing in a single stock has the same relative riskiness as investing in the S&P index.
Explanation / Answer
1)
Calculate the rate of return earned on the S&P index 500:
Rate of return
((index in 2007-index in 2008)/index in 2007)*100)+4.5
Rate of return= ((1410-925)/925)*100)+4.5
=56.9324
2)
It is better to diversify the portfolio rather than investing in a single stock, as it is more risky to invest in single stock, if the invested stocks have fall in the value or underperformance or decline market price of particular investments leading to huge loss to the investor, so, it is better to diversify the portfolio.
Hence option B is correct, that is B. In general, investing in a single stock is riskier than investing in the S&P index.
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