Question

Compare Nike and Adidas estimated stock prices with actual stock prices as of January 2, 2019. Then tell whether each stock is undervalued or fair-valued or overvalued based on your estimation. What’s your decision if you hold these stocks? What’s your decision if you don’t hold these stocks?

1. Using annual stock price between 2013 and 2018, compute the following returns. For stock price data, use the closing price of the last trading day of the year:

1) Total Dollar Return for 2014, 2015, 2016, 2017, 2018

2) Total Percent Return for 2014, 2015, 2016, 2017, 2018

2. Using annual stock price between 2013 and 2018, compute the following returns. For stock price data, use the closing price of the last trading day of the year: (25 points)

1) Arithmetic Average Return

2) Geometric Average Return

3) Holding Period Return

4) 2-year forecast Return

5) 3-year forecast Return

Answer 1

(1) total dollar return for any year = closing price of that year minus closing price of previous year

total % return for any year = ((closing price of that year / closing price of previous year) - 1)*100

	Nike	Adidas	Total Dollar Return - Nike	Total % Return - Nike	Total Dollar Return - Adidas	Total % Return - Adidas
2013	39.32	92.64
2014	48.08	57.62	8.76	22.28%	-35.02	-37.80%
2015	62.50	89.91	14.42	29.99%	32.29	56.04%
2016	50.83	150.15	-11.67	-18.67%	60.24	67.00%
2017	62.55	167.15	11.72	23.06%	17.00	11.32%
2018	74.14	182.40	11.59	18.53%	15.25	9.12%

(2)

(1) Arithmetic mean return is calculated using the AVERAGE function in Excel and passing the values of "Total % Return" into the function

Arithmetic mean return of Nike = 15.04%

Arithmetic mean return of Adidas = 21.14%

(2) To calculate geometric mean, we create a column with the heading (1 + total return %). This is nothing but (1 + Total Return %), expressed as a decimal. Now, we calculate the geometric mean of this series of values using the GEOMEAN function in Excel. This mean minus 1 is the geometric mean return for the period

geometric mean return of Nike = 1.1352 - 1.0000 which is 13.52%

geometric mean return of Adidas = 1.1451 - 1.0000 which is 14.51%

(3) Holding period return = (closing price at end of period / closing price at beginning of period) - 1

HPR of Nike = (74.14 / 39.32) - 1 , which is 0.8856, or 88.56%

HPR of Adidas = (182.4 / 92.64) -1, which is 0.9689, or 96.89%