1A) What is the one-year holding period return for a stock that was purchased fo
ID: 2816972 • Letter: 1
Question
1A) What is the one-year holding period return for a stock that was purchased for $22.40 at the beginning of the year, paid out $1.75 in dividends, and was sold for $28.25?
20.7%
26.1%
26.9%
33.9%
1B) Suppose investors in Acme Co., Inc. expect to earn a return of 4% (with a 20% probability), a return of 10% (with a 60% probability) and a 20% return (with a probability of 20%). What is the expected return for Acme’s stock?
11.3%
10.8%
34.0%
11.2%
1C) What is the standard deviation of Acme Co., Inc given the expectations of a 4% return 20% of the time, a 10% return 60% of the time, and a 20% return 20% of the time?
0.27%
5.15%
23.77%
9.75%
1D)
Scenario Probabilities
Scenario Returns - Security A
Scenario Returns - Security B
Scenario Returns- Security C
.35
15%
25%
-6%
.25
10%
12%
0
.25
7%
7%
-3%
.15
5%
1%
4
What are the expected returns for each of the three stocks (A, B, and C)?
11.75%, 11.75%, 3.50%
10.25%, 13.65%, -2.25%
14.00%, 14.30%, -1.15%
2.00%, 1.67%, 2.17%
a.20.7%
b.26.1%
c.26.9%
d.33.9%
Explanation / Answer
Answer 1A:
Holding Period Return = (Selling Price + Dividend - Purchase Price) / Purchase Price
Holding Period Return = ($28.25 + $1.75 - $22.40) / $22.40
Holding Period Return = 33.9%
Answer 1B:
Expected Return = 4% * 20% + 10% * 60% + 20% * 20%
Expected Return = 10.8%
Answer 1C:
Expected Return = 4% * 20% + 10% * 60% + 20% * 20%
Expected Return = 10.8%
Variance = 0.20 * (0.04 - 0.108)^2 + 0.60 * (0.10 - 0.108)^2 + 0.20 * (0.20 - 0.108)^2
Variance = 0.002656
Standard Deviation = (0.002656)^(1/2)
Standard Deviation = 5.15%
Answer 1D:
Security A:
Expected Return = 0.35 * 15% + 0.25 * 10% + 0.25 * 7% + 0.15 * 5%
Expected Return = 10.25%
Security B:
Expected Return = 0.35 * 25% + 0.25 * 12% + 0.25 * 7% + 0.15 * 1%
Expected Return = 13.65%
Security C:
Expected Return = 0.35 * (-6%) + 0.25 * 0% + 0.25 * (-3%) + 0.15 * 4%
Expected Return = -2.25%
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