a. You have accumulated data on three stocks (see below). You have decided to use the information on these stocks to form an index. You want to find the average earned rate of return for 2011 on your index. If you follow the averaging procedure used to calculate the S&P 500 Index return, what would your index's rate of return be? Hints: Rates of return are based on beginning-of-year prices, and the S&P
Index is weighted by market values of the companies in the index.
| Stock |
Dividend |
Beginning Price |
Ending Price |
Sharing Outstanding (millions) |
| A |
$1.50 |
$30.00 |
$32.00 |
5.00 |
| B |
$2.00 |
$28.50 |
$27.00 |
4.50 |
| C |
$0.75 |
$20.00 |
$24.00 |
20.00 |
b.Consider the following scenario: John buys a house for $135,000 and takes out a five year adjustable rate mortgage with a beginning rate of 5%. He makes annual payments rather than monthly payments.
Unfortunately for John, interest rates go up by 1% for each of the five years of his loan (Year 1 is 5%, Year 2 is 6%, Year 3 is 7%, Year 4 is 8%, Year 5 is 9%).
Calculate the amount of John's payment over the life of his loan. Compare these findings if he would have taken out a fix rate loan for the same period at 6.5%. Which do you think is the better deal?