Mini-Case After graduating from college last spring with a major in ac- Dat coun
ID: 2786198 • Letter: M
Question
Mini-Case After graduating from college last spring with a major in ac- Dat counting and finance, Jim Hale took a job as an analyst trainee for an investment company in Chicago. His first few weeks 1-Nov-11 5.69 were filled with a series of rotations throughout the firm's vari 1-Dec-11 5.4 ous operating units, but this week he was assigned to one of the 3-Jan-12 6.7 firm's traders as an analyst. On his first day Jim's boss called him in and told him that he wanted to do some rudimentary 1-Mar-12 8.02 analysis of the investment returns of a semiconductor manu- facturer called Advanced Micro Devices, Inc. (Ticker: AMD). 1-May-12 Closing Price Closing Price Date 1-Jun-12 5.73 2-Jul-12 4.06 1-Aug-12 3.72 4-Sep-123.37 1-Oct-12 2.05 1-Nov-12 1.88 1-Feb-12 7.35 2-Apr-12 7.36 6.08 Specifically, Jim was given the following month-end clos. He was then instructed by his boss to complete the follow ing prices for the company spanning the November 1, 2011, ing tasks using the AMD price data (note that AMD paid no through November 1, 2012: dividend during 2008).Explanation / Answer
5) Date Closing Price % return 1+% return 01-Nov-11 5.69 01-Dec-11 5.40 -5.10% 94.90% 01-Jan-12 6.71 24.26% 124.26% 01-Feb-12 7.35 9.54% 109.54% 01-Mar-12 8.02 9.12% 109.12% 01-Apr-12 7.36 -8.23% 91.77% 01-May-12 6.08 -17.39% 82.61% 01-Jun-12 5.73 -5.76% 94.24% 01-Jul-12 4.06 -29.14% 70.86% 01-Aug-12 3.72 -8.37% 91.63% 01-Sep-12 3.37 -9.41% 90.59% 01-Oct-12 2.05 -39.17% 60.83% 01-Nov-12 1.88 -8.29% 91.71% Geomean -8.82% CAGR -66.96% 6) The geometric return would be more appropriate simply because of the fact that by holding an investment, the money grows in compouding fashion and not linearly For example if we invest $100 and the monthly returns are 5% & 10% respectively, then the arithmetic average is 7.5% So as per arithmetic average money is expected to grow to 100X(1+7.5%) $ 107.50 While the geometric average is 7.47% So amount will grow to $ 115.50 Actual growth 100X(1+5%)*(1+10%) $ 115.50