10. Download the

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

per month.

Ford Motor Co (F)

11. Using the same data as in Problem

10, compute the

a. Average monthly return over this

period.

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.

13.

Compute the

95% confidence

interval of

the

estimate

of the

average

monthly

return you calculated in

Problem 11(a).

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

portfolios?

15.

Download the spreadsheet from MyFinanceLab containing the data for

Figure 10.1.

a. Compute the average

return for each of the assets

from 1929 to 1940 (The

Great

Depression).

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

intuition?

16.

Using the data from Problem 15, repeat your analysis over the

1990s.

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

periods?

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

Figure 10.1.

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

stocks.

18.

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?

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