Question

Class Handd Checked Returns Current stock price 22.34 10 Pessimistic Projections Number of analysts Future Price Future Dividend 18.15 0,10 Middle-of-the-road Projections Number of analysts Future Price Future Dividend 22.80 0.13 Optimistic Projections Number of analysts Future Price Future Dividend 26.01 0.24 Note: please find the possible returns (there are three of them). 1 What is the consensus return (expected return)? A Between 0.0% and 7.0% B Between 7.0% and 12.0% C Between 12.0% and 17.0% D Between 17.0% and 30.0% 2 What is the standard deviation of possible returns A Between 0.0% and 11.0% B Between 11.0% and 14.0% C Between 14.0% and 17.0% D Between 17.0% and 25.0%

Answer 1

Possible returns= ((Future price+dividend) / Current price ) -1

Current price 22.34 Pessimistic Middle Optimistic 10 32 58 22.8 26.01 0.1 0.13 0.24 Analysts Future price dividend Returns (capital gains + dividend yield) 18.15 -18.31% 2.64% 17.50%

Expected return= $\sum$ Return* Weight of anlysts for each of the 3 situations

so in pessimistic case, weightof analysts= 10/(10+32+58)= 10%

Return= (10*-18.31% + 32*2.64% + 58*17.5%)/ 100

=0.0917 = 9.17%

Thus Option B is correct

Part 2

The calculations for standard deviation are as shown below:

Current price Analysts Future price dividend 22.34 Pessimistic Middle Optimistic 10 32 58 18.15 22.8 26.01 0.1 0.13 0.24 Returns (capital gains + dividend yield) -18.31% 2.64% 17.50% -1.83% 0.85% 10.15% 9.17% Analyst weighted* return Expected return Deviation from expected return Square of deviation numbers Probability (analyst weighted)* squared deviation Variance (sum of above row values) Standarda deviation (square root of variance) -27.47% -6.52% 8.34% 0.07547981 0.004257 0.00694992 0.00754798 0.001362 0.00403095 0.012941 11.38%

So standard deviation= 11.38%

Thus Option B is the correct answer