Finance problems 3 answer for students use it as sample
Forecasting of future rates of return on the stock market through the use of a 5 or 10year average of historical returns is considered to be good. However, 10 years is not believed to be a sufficient amount of time when it comes to estimating average rate of return (Rapach & Zhou, 2013). The time not being well sifficient makes the 5 or 10year average to be a bit misleading when forecasting average rate of return.
The statement that stocks offer higher longrun rates of return compared to bonds is true. They have greater returns potential compared to bonds. But the volatility of stock is very high (This means that the measure of dispersion when it comes to the returns is high. Higher volatility makes the stock be riskier). Stocks have higher standard deviation of returns. The investment that is preferable to a person relies on the amount of risk that the person is in a position to tolerate. This matter is very complicated, and it relies on a number of factors. One factor that becomes very important is the investment time horizon (Eraker & Ready, 2015). For example, if an investor or investors have a short time horizon, then it means that stocks are generally not the prefered option. Stocks will be a prefered option if the investment time horizon is a bit long.
“Each of the following statements is dangerous or misleading. Explain why.
a. A longterm United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher longrun rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5 or 10year average of historical returns.
“
Problem 711  
Each of the following statements is dangerous or misleading. Explain why. a. A longterm United States government bond is always absolutely safe. b. All investors should prefer stocks to bonds because stocks offer higher longrun rates of return. c. The best practical forecast of future rates of return on the stock market is a 5 or 10year average of historical returns. 

Answers:  
a.  A longterm bond of the government of the United States is always totally safe. Ths is in terms of dollars received. However, there seems to be a problem where the price of bond always fluctuates when there is change in the interest rates. Apart from the change in the interest rate, fluctuation also takes place when there is a change in the rate at which the payment of coupon received can easily be invested. Additiiionally, the payment are in the form of nominal dollars (Saez & Zucman, 2014). This calls for inflation risk to be considered.  
b.  The statement that stocks offer higher longrun rates of return compared to bonds is true. They have greater returns potential compared to bonds. But the volatility of stock is very high (This means that the measure of dispersion when it comes to the returns is high. Higher volatility makes the stock be riskier). Stocks have higher standard deviation of returns. The investment that is preferable to a person relies on the amount of risk that the person is in a position to tolerate. This matter is very complicated, and it relies on a number of factors. One factor that becomes very important is the investment time horizon (Eraker & Ready, 2015). For example, if an investor or investors have a short time horizon, then it means that stocks are generally not the prefered option. Stocks will be a prefered option if the investment time horizon is a bit long.  
c.  Forecasting of future rates of return on the stock market through the use of a 5 or 10year average of historical returns is considered to be good. However, 10 years is not believed to be a sufficient amount of time when it comes to estimating average rate of return (Rapach & Zhou, 2013). The time not being well sifficient makes the 5 or 10year average to be a bit misleading when forecasting average rate of return.  
References  
Rapach, D. E., & Zhou, G. (2013). Forecasting stock returns. Handbook of Economic Forecasting, 2(Part A), 328383.  
Eraker, B., & Ready, M. (2015). Do investors overpay for stocks with lotterylike payoffs? An examination of the returns of OTC stocks. Journal of Financial Economics, 115(3), 486504  
Saez, E., & Zucman, G. (2014). Wealth inequality in the United States since 1913: Evidence from capitalized income tax data (No. w20625). National bureau of economic research

Problem 818  
Some true or false questions about the APT: a. The APT factors cannot reflect diversifiable risks. b. The market rate of return cannot be an APT factor. c. There is no theory that specifically identifies the APT factors. d. The APT model could be true but not very useful, for example, if the relevant factors change unpredictably. Respond to each question – true or false – and why. 

Answer:  
T/F  
a.  TRUE  this is true as per the definition, but the factors are representive of macroeconomic risks that are not easily eliminated by diversification  
b.  FALSE  because ATP does not in any way specify the factors  
c.  TRUE  since investors will not be in a possition to take on nondiversifiable risk only if it entails a positive risk premium  
d.  TRUE  there is no widely accepted theory regarding how the factors should be.  
Problem 72  
The following table shows the nominal returns on U.S. Stocks and the rate of inflation:  
Year  Nominal Return (%)  Inflation (%)  
2004  12.5  3.3  
2005  6.4  3.4  
2006  15.8  2.5  
2007  5.6  4.1  
2008  37.2  0.1  
a) What was the standard deviation of the market returns?  
b) Calculate the average real return.  
Answers:  
a) What was the standard deviation of the market returns?  
Find the standard deviation by completing the table with the appropriate formulas  
Year  Nominal Return (%)  Difference from Average  Squared Difference  TIP: Click on the cell for directions  
2004  12.5  2.2  4.84  
2005  6.4  3.6  12.96  
2006  15.8  5.5  30.25  
2007  5.6  4.7  22.09  
2008  37.2  47.5  2256.00  
Total 20042008  10.3  2326.14  
Average  2.06  465.20  
Std. Deviation  19.29  Use SQRT function for this answer only  
b) Calculate the average real return.  
Find the average real return by completing the table with the appropriate formulas  
Year  Nominal Return (%)  Inflation (%)  Real Return (%)  TIP: Click on the cell for directions  
2004  12.5  3.3  15.800  
2005  6.4  3.4  9.800  
2006  15.8  2.5  18.300  
2007  5.6  4.1  9.700  
2008  37.2  0.1  37.100  
Average  1650.00%  

