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.
Problem 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.
Problem 3: Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas in Table 8.2 (p. 193) - also provided below.
a. Calculate the expected return from Dell.
b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
Problem 4: "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.
Respond to each question - true or false - and why."