Question

The stock of Business Adventures sells for $50 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: Boon Normal economy Recession Dividend $3.00 1.40 0.70 Stock Price $58 52 03:20:11 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.) eBook Expected return Standard deviation % Print 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 3%. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation -

Answer 1

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Answer:

Blank 1: 5.40%

Blank 2: 14.16%

Blank 3: 4.20%

Blank 4: 7.08%

We use the below equation to calculate the holding period return of each scenario: HPR = Ending Price - Beginning Price + Cash Dividend / Beginning Price The holding period returns for the three scenarios are: Boom: (58 - 50 + 3.0)/50 = 0.22 = 22% Normal: (52 - 50 + 1.4)/50 = 0.068 = 6.8% Recession: (43 - 50 +.70)/50 = -0.1260 = -12.60% E(HPR) = [(1/3) * 0.22] + [(1/3) * 0.068] + [(1/3) * (-0.1260)] = 0.05400 or 5.40% Var(HPR) = [(1/3) * (0.22 - 0.05400)^2] + [(1/3) * (0.068 -0.05400)^2] + [(1/3) + (-0.1260 - 0.05400)^2] = 0.020051 SD(r)=o=War(r)-= V 0.020051. - 0.14160 or 14.16% b. E(r) = (0.5 * 5.40%) + (0.5 * 3%) = 4.20% o = 0.5 * 14.16% = 7.08%