Question

1. You've recorded the following prices and dividend payments for a stock:

Month	Stock price	Dividend
1	161.38
2	161.54	1.32
3	159.96
4	164.61
5	164.8	1.32

Part 1

What was the arithmetic average monthly return?

Part 2

What was the geometric average return per month?

Part 3

What was the total return over the entire period?

2. Which statements are correct? The geometric average return _____.

Check all that apply:

is better for forecasting returns over many periods

is usually less than the arithmetic mean

takes into account compounding

is the simple average of the individual returns

3. Bank of America quotes a rate of 11.7% with monthly compounding for a consumer loan, while Wells Fargo quotes you 12% with annual compounding.

a. What is the EAR for Bank of America?

b. What is the EAR for Wells Fargo?

c. As a borrower, which loan should you take?

The loan from Bank of America

The loan from Wells Fargo

Answer 1

Answer :

QUESTION 2.

The geometric average return

a) is better for forecasting returns over many periods

b) is usually less than the arithmetic mean takes into account compounding .

Question 3.

EAR = [1+(nominal rate/number of compounding periods)]^(number of compounding periods) -1

Part A : EAR for Bank Of America = [1+(0.117/12)]^12 -1 = 1.1235-1=0.1235=12.35%

Part B : EAR for Wells Fargo = [1+(0.12/1)]^1 -1 = 1.12-1 = 0.12 =12%

As a borrower, the loan from Wells Fargo should be taken as it has lower EAR.

Hope it helps. Thank you :)