The stock of business adventures sells for $40 a share. Its likely dividend payo

Question

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: Dividend Stock Price Boom $2.80 $48 Normal Economy 1.80 43 Recession .90 34 a) calculate the expected holding-period return and standard deviation of the holding period return. all three scenarios are equally likely. (Do not round up intermediate calculations. round your answers to 2 decimal places.) Expected return .... 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 up intermediate calculations. round your answers to 2 decimal places.) Expected return .... standard deviation ...

Explanation / Answer

Hi, Please find the answer as follows: Expected Return = (10.8)/40*1/3 + (4.80)/40*1/3 - (5.1)/40*1/3 = 8.75% Variance = 1/3*(.09 -.0 875)^2 + 1/3*(.12 - .0875)^2 + 1/3*(-.1275 - .0875)^2 = 0.0157625 SD = (0.0157625)^1/2 = .0078 or .008 Part B: Expected Return = .50*(8.75) + .50*(5) = 6.875 or 6.88% Variance = .50*(.0875 - .0688)^2 + .50*(.025 - .0688)^2 = .0011 SD = .001 Thanks.

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