Instructions
1. The question is provided for each problem.
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a. T requires a text answer.
b. C requires a calculation. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, using Excel format/formula/function and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.
c. F requires a number only. In some problems, a "Step 1" is added to help you solve the problem.
1. The following table shows the nominal returns on U.S. Stocks and the rate of inflation:
| |
|
|
| Year |
Nominal Return (%) |
Inflation (%) |
| 2004 |
12.5 |
3.3 |
| 2005 |
6.4 |
3.4 |
| 2006 |
15.8 |
2.5 |
| 2007 |
5.6 |
4.1 |
| 2008 |
-37.2 |
0.1 |
a) What was the standard deviation of the market returns?
b) Calculate the average real return.
2. "Each of the following statements is dangerous or misleading. Explain why.
a. A long-term United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.
3. Some true or false questions about the APT:
a. The APT factors cannot reflect diversifiable risks.
b. The market rate of return cannot be an APT factor.
c. There is no theory that specifically identifies the APT factors.
d. The APT model could be true but not very useful, for example, if the relevant factors change unpredictably.