Determine the arithmetic mean return

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Reference no: EM1373153

1. Downup corporation has the following return history: for the 1st six years, the stock went down 10 percent each year [this period is remembered as the "down" period by Downup shareholders], then in the next 6-years the stock went up 15 percent each year ("the UP phase"). Hotcold was established in the same year as the rival Downup. The return history for Hotcold was as follows: in the first six years the stock went up by 8% each year, but for the next 6 years the stock went down by 4%.
[A] Determine the arithmetic mean return of the two stocks?
[B] What's their geometric mean return?
[C] Which one would you rather have bought, in retrospect? Why?

2. A share of stock sells for $50 today. It will pay a $1 dividend per share at the end of the year. The risk free rate is 6% and the expected return on the market is 16%. The stock's beta is 0.8. What do investors expect the stock to sell for at the end of the year?

Reference no: EM1373153

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