Question

Assignment Chapter 12- Investing in Stocks and Bonds s Back to Assignment Attempt Keep the Highest: 13 3. Forecasting stock value Understanding the returns from investing hen buying stock, you can expect to earn money through future current income (from ) and future capital appreciation (from ). Together, your l earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options. tota Understanding the Approximate Yield Equation The formula for the approximate yield of an investment can look intimidating, but it's really just a function of three things: (1) average current income, (2) average capital gains, and (3) the average value of the investment. Based on the information in the table, compute each of these values for the two stocks over a 3-year period and enter the values into the bottom half of the table. Expected average annual dividends (2012-2014) Current stock price Expected future stock price (2014) Stock 1 $1,15 $60 $72 Stock 2 $2.85 $113 $146 Average current income (CI) Average capital gains (CG) Average value of the investment (VI) Next, derive the correct formula for approximate yield by correctly arranging these three variables in the equation that follows Approximate Yield

Answer 1

Future current income is from dividend yield and Future capital appreciation from capital gains

Avg current income for Stock 1 is the dividend $1.15 and avg current income for stock 2 is the dividend $2.85

Avg capital gain for Stock 1 is future price - current stock price = $72-$60=$12 and Avg capital gain for Stock 2 is future price - current stock price = $146-$113=$33

Average value of investment is sum of the above two gains; for stock 1 it is $1.15+$12=$13.15 and for stock 2 it is $2.85+$33=$35.85

Approx yield for stock 1 is total gains/ current stock price = $13.15/$60=21.92%

Approx yield for stock 2 is total gains/ current stock price = $35.85/$113=31.73%

Risk is proportional to return

Therefore stock 1 has to have lower risk to be comparable to stock 2. Hence answer is true