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1. Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no
dividends.
Time
Caswell
1
$12
2
9
3
7
4
6
5
8
•Calculate the average rate of return for each year from the above information..
•What is the arithmetic average rate of return earned by investing in Caswell’s stock over this period?.
•What is the geometric average rate of return earned by investing in Caswell’s stock over this period?.
•Considering the beginning and ending stock prices for the five-year period are the same, which type of
average rate of return best describes the annual rate of return earned over the period (arithmetic or
geometric)?.
•The annual rate of return at the end of year 3 is what percent?
2. On December 5, 2007, the common stock of Google, Inc. (GOOG) was trading at $698.51. One year
later, the shares sold for $301.99. Google has never paid a common stock dividend. What rate of return
would you have earned on your investment had you purchased the shares on December 5, 2007? The rate
of return you would have earned is what percent?
3. The common stock of Plaxo Enterprises had a market price of $9.45 on the day you purchased it just 1
year ago. During the past year, the stock paid a dividend of $1.43 and closed at a price of $11.66. What
rate of return did you earn on your investment in Plaxo’s stock? The rate of return you earned on Plaxo’s
stock is what percent?
4. Syntex is considering an investment in one of two stocks. Given the information that follows, which
investment is better based on the risk (the standard deviation) and return? Given the information in the
table, what percent is the rate of return for Stock B?
STOCK A
Probability
0.20
0.60
0.20
STOCK B
Return
10%
16%
21%
Probability
0.10
0.40
0.40
0.10
Return
-7%
5%
13%
20%

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