Question

Saved Problem 5-6 The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Boom Normal economy Recession Dividend Stock Price $2.80 $48 1.80 43 0.90 a. Calculate the expected holding-period return and standard deviation of the holding period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected retum Standard deviation b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 5% (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation

Answer 1

A.

	Divident $ (A)	Opening Price ($) (B)	Closing Price (C)	Return D = (A + (C-B)	Probability (E)	Average Return F = D*E	D^2	D^2*E
Boom	2.8	40	48	10.8	0.33	3.56	116.64	38.4912
Normal Economy	1.8	40	43	4.8	0.33	1.58	23.04	7.6032
Recession	0.9	40	34	-5.1	0.34	(1.73)	26.01	8.8434
						3.41		54.94

So Expected Return = 3.41 %

And Standard Deviation = SqRoot Of Variance

i.e Sq Root of 54.94 i.e 7.41 %

B.

Expected Return = .50*3.41+.50*5 = 4.21%

Standard Deviation of government bond is 0

So Standard Deviation of portfolio is (7.41*.50 + 0 * .50) = 3.71%