5.You invest in a stock that costs $42.50 per share.It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year's end.What is your expected rate of return if you sell the stock for $45 at the end of the year? Answer:Expected rate of return Ending Price -Beginning Price Cash Dividend Beginning Price =$45-S42.50+$1.80 S42.50 =10.12% 6.Refer to Question 5.What if you do not sell the stock at the end of the year? Answer:You measure the rate of return exactly the same way,whether or not you sell.The price appreciation is as much a part of your returns the dividend.That you choose to keep it does not change the fact that you could convert it into $45 cash at the end of the year. 7.You invest in a stock that costs $42.50 per share.It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year's end.What is your realized rate of return if the stock's price is actually $39 at year's end? Answer:Realized rate of return Ending Price-Beginning Price Cash Dividend Beginning Price =S39-S42.50+$1.80 S42.50 =-4% 8.Suppose the risk-free nominal interest rate on a one-year U.S.Treasury bill is 5%per year and the expected rate of inflation is 3%.What is the expected real rate of return on the T-bill? Answer: Real rate Nominal interest rate -Rate of Inflation 1 Rate of inflation =0.05-0.03 1+0.03 =0.02 1.03 =1.94% 2-152-15 5. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year’s end. What is your expected rate of return if you sell the stock for $45 at the end of the year? Answer: Expected rate of return = Ending Price – Beginning Price + Cash Dividend Beginning Price = $45 - $42.50 + $1.80 $42.50 = 10.12% 6. Refer to Question 5. What if you do not sell the stock at the end of the year? Answer: You measure the rate of return exactly the same way, whether or not you sell. The price appreciation is as much a part of your returns the dividend. That you choose to keep it does not change the fact that you could convert it into $45 cash at the end of the year. 7. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year’s end. What is your realized rate of return if the stock’s price is actually $39 at year’s end? Answer: Realized rate of return = Ending Price – Beginning Price + Cash Dividend Beginning Price = $39 - $42.50 + $1.80 $42.50 = -4% 8. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 5% per year and the expected rate of inflation is 3%. What is the expected real rate of return on the T-bill? Answer: Real rate = Nominal interest rate – Rate of Inflation 1 + Rate of inflation = 0.05 – 0.03 1 + 0.03 = 0.02 1.03 = 1.94%