Question

A stock has had the following year-end prices and dividends: Year     Price Dividend 1 $ 63.40...

A stock has had the following year-end prices and dividends:
Year     Price Dividend
1 $ 63.40 -
2 70.20 $ .85
3 79.18 .95
4 75.32 1.03
5 84.18 1.11
6 98.62 1.20

What are the arithmetic and geometric average returns for the stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
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Homework Answers

Answer #1

Return = [P1 - P0 + D] / P0

R1 = [$70.20 - $63.40 + $0.85] / $63.40 = 12.07%

R2 = [$79.18 - $70.20 + $0.95] / $70.20 = 14.15%

R3 = [$75.32 - $79.18 + $1.03] / $79.18 = -3.57%

R4 = [$84.18 - $75.32 + $1.11] / $75.32 = 13.24%

R5 = [$98.62 - $84.18 + $1.20] / $84.18 = 18.58%

A.M. = [Ri] / n = [12.07% + 14.15% - 3.57% + 13.24% + 18.58%] / 5 = 54.45% / 5 = 10.89%

G.M. = [(1 + R1) x (1 + R2) x ----- x (1 + RN)]1/N

= [1.1207 x 1.1415 x 0.9643 x 1.1324 x 1.1858]1/5 = [1.6562]0.2 - 1 = 1.1062 - 1 = 0.1062, or 10.62%

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