Investment Category Arithmetic Mean Geometric Mean Standard Deviation of Return

Fin550 560

3. Using published sources (for example, The Wall Street Journal, Barron’s, Federal Reserve Bulletin), look up the exchange rate for U.S. dollars with Japanese yen for each of the past 10 years (you can use an average for the year or a specific time period each year). Based on these exchange rates, compute and discuss the yearly exchange rate effect on an investment in Japanese stocks by a U.S. investor. Discuss the impact of this exchange rate effect on the risk of Japanese stocks for a U.S. investor.

4. The following information is available concerning the historical risk and return relationships in the U.S. capital markets:

Us Capital Markets total annual returns, 1990-2011

Investment Category Arithmetic Mean Geometric Mean Standard Deviation of Return

Common Stocks 10.28% 8.81%  16.9%

Treasury Bills 3.54 3.49  3.2

Long term government bills 5.10 4.91  6.4

Long term Corporate bonds 5.95 5.65  9.6

Real estate 9.49 9.44  4.5

Based on arithmetic mean

a.Explain why the geometric and arithmetic mean returns are not equal and whether one or the other may be more useful for investment decision making.

b.For the time period indicated, rank these investments on a relative basis using the coefficient of variation from most to least desirable. Explain your rationale.

c.Assume the arithmetic mean returns in these series are normally distributed. Calculate the range of returns that an investor would have expected to achieve 95 percent of the time from holding common stocks.

5.You are given the following long-run annual rates of return for alternative investment instruments:

U.S. Government   T-bills

3.50%

Large-cap common stock

11.75

Long-term corporate   bonds

5.50

Long-term government   bonds

4.90

Small-capitalization common   stock

13.10

The annual rate of inflation during this period was 3 percent. Compute the real rate of return on these investment alternatives.

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