Joel purchased a security at the start of the year for $900

1. Joel purchased a security at the start of the year for $900. Over the course of the year, the security paid $17 in income and the price at the end of the year was $907. Calculate the current yield.

2. Joel purchased a security at the start of the year for $900.  Over the course of the year, the security paid $17 in income and the price at the end of the year was $907.  Calculate the capital gains yield.

3. Joel purchased a security at the start of the year for $900.  Over the course of the year, the security paid $17 in income and the price at the end of the year was $907.  Calculate the return on the security.

4. Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.

    Investment A:

Total return = 10 percent with probability 50 percent

Total return = 20 percent with probability 50 percent

Investment B:

Total return = 12 percent with probability 40 percent

Total return = 18 percent with probability 60 percent

Investment C:

Total return = 5 percent with probability 60 percent

Total return = 25 percent with probability 40 percent

The expected return of investment C is ____ percent

5. Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.

Investment A:

Total return = 10 percent with probability 50 percent

Total return = 20 percent with probability 50 percent

Investment B:

Total return = 12 percent with probability 40 percent

Total return = 18 percent with probability 60 percent

Investment C:

Total return = 5 percent with probability 60 percent

Total return = 25 percent with probability 40 percent

The standard deviation of investment A is ____ percent.

6. A stock’s price is $100 at the beginning of a year. There is a 25 percent chance that the price will be $90 at the end of the year, and a 75 percent chance that the price will be $130 at the end of the year. The stock will pay a dividend of $10 during the year. Calculate the stock’s expected return.

7. A stock’s price is $100 at the beginning of a year. There is a 25 percent chance that the price will be $90 at the end of the year, and a 75 percent chance that the price will be $130 at the end of the year. The stock will pay a dividend of $10 during the year. Calculate the standard deviation of the stock’s return.

8. Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.

Investment X:

Total return = 10 percent with probability 50 percent

Total return = 20 percent with probability 50 percent

Investment Y:

Total return = 12 percent with probability 40 percent

Total return = 18 percent with probability 60 percent

Investment Z:

Total return = 5 percent with probability 60 percent

Total return = 25 percent with probability 40 percent

The expected return of investment Y is ____ percent.

Which investment is preferred by a risk-averse investor?

Here’s the SOLUTION

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