*please explain how to do problem* The stock of Business Adventures sells for $4

Question

*please explain how to do problem*

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:

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.)

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 4%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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:

Explanation / Answer

a. holding period return for BOOM = (50+2-40)/40 = 30%

holding period return for Normal economy = (43+1-40)/40 = 10%

holding period return for Recession = (34+0.5-40)/40 =-13.75%

expected holding-period return = 1/3*30% + 1/3*10% -1/3*13.75% = 8.75%

standard deviation of the holding-period return =sqrt (1/3*(30%-8.75%)^2 + 1/3*(10%-8.75%)^2 +1/3*(-13.75% -8.75%)^2) = 17.88%

b. expected return = 50%*8.75% + 50%*4% = 6.38%

standard deviation of a portfolio = 1/2*standard deviation of buisness adventures = 1/2*17.88% = 8.94%

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