) The shares of XYZ, Inc. are expected to generate the following possible return
ID: 1122817 • Letter: #
Question
) The shares of XYZ, Inc. are expected to generate the following possible returns over the next 12 months:
Return Probability -5% 0.10 5% 0.25 10% 0.30 15% 0.25 5% 0.10
a. If the stock is currently trading at $50/share, what is the expected price in one year? Assume that the stock pays no dividends. b. What is the standard deviation of the returns on Misheak Inc.? c. ABC Inc. stocks have an expected price of $60, and a standard deviation of 15%. Is there a clearly dominant stock to invest in? Explain
Explanation / Answer
Return
Probability
-5%
0.1
5%
0.25
10%
0.3
15%
0.25
5%
0.1
0.05 ´ 0.10 0.05 ´ 0.25 0.10 ´ 0.30 0.15 ´ 0.25 0.5 ´ 0.10 0.08
Hence the expected price is $50 * (1.08) $54
Level
Return
Expected Value
1
-5%
47.5
2
5%
52.5
3
10%
55
4
15%
57.5
5
5%
52.5
From the above table we can calculate the standard deviation as,
Here is the mean = (47.5+52.5+55+57.5+52.5)/5 = 53
Hence the S.D. is
=
=[1/5{(47.5-54)2+(52.5-54)2+(55-54)2+(57.5-54)2+(52.5-54)2}]
= 3.70
From the above information there is no clear dominant stock to invest. As, ABC Inc. gives more return($60) with more risk(15%). Whereas, XYZ Inc. gives lower return($54) with lower risk(3.7%)
Return
Probability
-5%
0.1
5%
0.25
10%
0.3
15%
0.25
5%
0.1
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