Problem 5-6 The stock of Business Adventures sells for $35 a share. Its likely d

Question

Problem 5-6

The stock of Business Adventures sells for $35 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

$1.20    

$45     

  Normal economy

1.20    

38     

  Recession

.60    

26     

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.)

Explanation / Answer

Expected Return = 5.33%

Std Deviation = 3.77%

1). Table showing expected gain and standard deviation Div Cap Gain Total Pi Expected Deviation from mean Deviation^2 (Dev^2)Pi ((Dev^2)Pi)^1/2 Boom 1.2 10 11.2 0.333333           3.73           1.40           1.96 0.653333 0.326667 Normal 1.2 3 4.2 0.333333           1.40         -0.93           0.87 0.29037 0.145185 Recession 0.6 -9 -8.4 0.333333         -2.80         -5.13         26.35 8.783704 4.391852           2.33         29.18 9.727407 4.863704 Expected Holding period return = 2.33/35 = 6.66% Standard deviation = 4.86%

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