Compute the variance and standard
deviation for each of the assets
spreadsheet from MyFinanceLab that
contains historical monthly prices and
dividends (paid at the end of the month) for Ford Motor Company
stock (Ticker: F) from August 1994 to August 1998. Calculate the
realized return over this period, expressing your answer in percent
Ford Motor Co (F)
11. Using the same data as in Problem
10, compute the
a. Average monthly return over this
b. Monthly volatility (or standard
deviation) over this period.
Ford Motor Co (F)
12. Explain the difference between the
average return you calculated in Problem 11(a) and the realized
return you calculated in Problem 10. Are both numbers useful? If
so, explain why.
return you calculated in
14. How does the relationship between
the average return and the historical volatility of individual
stocks differ from the relationship between the average return and
the historical volatility of large, well-diversified
Download the spreadsheet from MyFinanceLab containing the data for
a. Compute the average
return for each of the assets
from 1929 to 1940 (The
b. Compute the variance and standard
deviation for each of the assets from 1929 to 1940.
c. Which asset was
riskiest during the Great Depression?
How does that fit with your
Using the data from Problem 15, repeat your analysis over the
a. Which asset was riskiest?
b. Compare the standard deviations of the
assets in the 1990s to their standard deviations in the Great
Depression. Which had the greatest difference between the two
c. If you only had information about the
1990s, what would you conclude about the relative risk of investing
in small stocks?
17. What if
the last two
decades had been
“normal”? Download the
spreadsheet from MyFinanceLab containing the data for
a. Calculate the arithmetic average return
on the S&P 500 from 1926 to 1989.
b. Assuming that the S&P 500 had simply
continued to earn the average return from (a), calculate the amount
that $100 invested at the end of 1925 would have grown to by the
end of 2008.
c. Do the same for small
Consider two local banks. Bank A has 100 loans outstanding, each
for $1 million, that it expects will be repaid today. Each loan has
a 5% probability of default, in which case the bank is not repaid
anything. The chance of default is independent across all the
loans. Bank B has only one loan of $100 million outstanding, which
it also expects will be repaid today. It also has a 5% probability
of not being repaid. Explain the difference between the type of
risk each bank faces. Which bank faces less risk? Why?