1. (Calculating rates of return) The common stock of Maco Enterprises had a market price of $12 on the day you purchased it just one year ago. During the past year the stock had paid a $1 dividend and closed at a price of $14. What rate of return did you earn on your investment in Maco’s stock?
2. (Expected rate of return and risk) Almay, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return?
Common Stock A Common Stock B
Probability Return Probability Return
0.3 11% 0.2 25%
0.4 15% 0.3 6%
0.3 19% 0.3 14%
3. (Expected rate of return) Carl Jones is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund’s performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes:
State of the Economy
Probability Fund Return
Rapid expansion and recovery 5% 100%
Modest growth 45% 35%
Continued recession 45% 5%
Falls into depression 5% -100%
Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
Calculate the standard deviation