a. a stock had returns of 8%, -6%, 18% and 27% over the past four years. what wa
ID: 2807629 • Letter: A
Question
a. a stock had returns of 8%, -6%, 18% and 27% over the past four years. what was the geometric average return of this stock?
b. a mutual fund has 4,000 shares of stock A at a price of $45 and 6,000 shares of stock B at a price of $35. if the fund has 20,000 shares outstanding, what is the NAV of the fund? assume there are no liabilities for this fund.
c. the stock price of PITA corporation indicates a 12.85% expected return. given that PITA has a beta of 0.65 and the current T-bill rate is 3.5%, what is the market risk premium? what is the market rate of return?
Explanation / Answer
a. a stock had returns of 8%, -6%, 18% and 27% over the past four years. what was the geometric average return of this stock?
Geometric average = [(1+r1)(1+r2)….(1+rn)]^(1/n) - 1
Geometric average = [(1+8%)(1-6%)(1+18%)(1+27%)]^(1/4) -1
Geometric average = 1.1106-1 => 11.06%
b. a mutual fund has 4,000 shares of stock A at a price of $45 and 6,000 shares of stock B at a price of $35. if the fund has 20,000 shares outstanding, what is the NAV of the fund? assume there are no liabilities for this fund.
($45 × 4,000 + $35 × 6,000) / 20,000 = $390,000 / 20,000 = $19.50
NAV = $19.50
c. the stock price of PITA corporation indicates a 12.85% expected return. given that PITA has a beta of 0.65 and the current T-bill rate is 3.5%, what is the market risk premium? what is the market rate of return?
As per CAPM
R = rf+beta(rmp)
12.85% = 3.5%+0.65(rmp)
0.65rmp = 9.35%
Rmp = 14.38%
Market risk premium = 14.38%
Market rate of return = 14.38%+3.5% = 17.88%
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