Add a brief paragraph to each problem explaining how you solved it.
Part 1
1. You sold a security for $980 that you purchased five years before for $795. What was the holding period return? Prove that this return overstates the annualized, compound return.
2. A stock costs $ 80 and pays a $4 dividend each year for three years.
a) If an investor buys the stock for $80 and expects to sell it for $100 after three years, what is the anticipated annual rate of return?
b) What would be the rate of return if the purchase price were $60?
c) What would be the rate of return if the dividend were $1 annually and the purchase price were $80 and the sale price were $100?
3. You purchase a stock for $100 that pays an annual dividend of $5.50. At the beginning of the second year, you purchase an additional share for $130. At the end of the second year, you sell both shares for $140. Determine the dollar- weighted return and the time- weighted compounded (i. e., geometric) return on this investment. Repeat the process but assume that the second share was purchased for $ 110 instead of $130. Why do the rates of return differ?
Part 2
1. What is the impact on GDP if consumer spending increases? Would the answer be different if the consumer spending was directed toward foreign goods?
2. What differentiates inflation and deflation? If both GDP and unemployment were simultaneously rising, would this period be classified as a recession?
3. What factors, besides the expected rate of inflation, may affect the rate of interest a borrower pays?
4. What is the Federal Reserve? What are its economic goals?
5. How does the Fed pursue its economic goals? How may the tools of monetary policy affect securities prices?
6. What is the difference between the discount rate and the targeted federal funds rate?
7. What are M1 and M2? How does the Fed alter M1 and M2?
8. Do the fundamental economic goals of fiscal policy differ from those of monetary policy? If the Federal Reserve finances the federal government's deficit, what will hap-pen to the supply of money?