Question

Question 4 (1 point) A stock DEF has the following payoffs probabilities: Probability 0.2 0.5 0.3 Payoff $100 $130 $200 What is the Expected Payoff to the stock? Your Answer: Answer Question 5 (1 point) During a 3-months period, the price index increases from 120.8 to 121.5. During the same period, a stock increases in price for $100 to $110.5. What is the real rate of return for the stock for the 3 month period? Express your answer as a percentage, for example 3.18% should be entered as 3.18 without the percentage sign. Your Answer: 11/27/

Answer 1

4.

Expected P.O = (0.2 × $100) + (0.5 × $130) + (0.3 × $200)

                        = $20 + $65 + $60

                        = $145 (Answer)

5.

Rate of inflation (r) should be calculated first.

PI of 3^rd year = PI of 1^st year × (1 + r) ^ months

121.5 = 120.8 × (1 + r) ^ 3

121.5 / 120.8 = (1 + r) ^ 3

1.0057947 = (1 + r) ^ 3

1.0057947 ^ (1/3) = (1 + r) ^ (3/3)

1.0057947 ^ 0.333333 = 1 + r

1.00192 – 1 = r

r = 0.00192

This is to be multiplied by 100 to get r in the percentage form; (0.00192 × 100 =) 0.19% rounded.

Now, the nominal rate (NR) of return should be calculated.

SP of 3^rd year = SP of 1^st year × (1 + NR) ^ months

110.5 = 100 × (1 + NR) ^ 3

110.5 / 100 = (1 + NR) ^ 3

1.105 ^ (1/3) = (1 + NR) ^ (3/3)

1.105 ^ 0.333333 = 1 + NR

1.03384 – 1 = NR

NR = 0.03384

This is to be multiplied by 100 to get NR in the percentage form; (0.03384 × 100 =) 3.38% rounded.

Real rate = Nominal rate – Inflation rate

                = 3.38% - 0.19%

                = 3.19 (Answer)