Question

Problem 2, Please show work!

A. The returns on a bond are normally distributed with a mean of 6% and a standard deviation of 13%. Calculate the range of returns into which 99% of the returns are projected to fall.

B. From 2017 to 2020 the returns on a stock were: 12.2%, – 3.8% 1.7%, and 15.2% Calculate the average arithmetic return.

C. From 2017 to 2020 the returns on a stock were: 12.2%, – 3.8% 1.7%, and 15.2% Calculate the average geometric return.

D. Over a 20-year period, the geometric return for a stock = 9.1%, and the arithmetic return = 9.3%. Using Blume’s formula, calculate the forecast return for a 5-year period.

Answer 1

1.
Range is mean-2.58*standard deviation to mean+2.58*standard deviation

Lower end=mean-2.58*standard deviation=6%-2.58*13%=-27.54000%

Upper end=mean+2.58*standard deviation=6%+2.58*13%=39.54000%

2.
=Sum(returns)/n
=(12.2%-3.8%+1.7%+15.2%)/4
=6.32500%

3.
=(Product(1+returns))^(1/n)-1
=((1+12.2%)*(1-3.8%)*(1+1.7%)*(1+15.2%))^(1/4)-1
=6.04381%

4.

=(5-1)/(20-1)*9.1%+(20-5)/(20-1)*9.3%
=9.25789%