Calculate the rate of return of Escapist Films for each economic state. (Negativ

Question

Calculate the rate of return of Escapist Films for each economic state. (Negative amounts should be indicated by a minus sign. Enter your answers as a whole percent.)

Calculate the expected return and standard deviation of Escapist if all three economic scenarios are equally likely to occur. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Calculate the rate of return of a portfolio half invested in Escapist and half in Leaning Tower of Pita for each economic state. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Calculate the expected rate of return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita. All three economic scenarios are equally likely to occur. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year:

Explanation / Answer

Part A)

The rate of return under each scenario can be calculated with the use of following formula:

Rate of Return = (Dividend + Stock Price Next Year - Current Stock Price)/Current Stock Price*100

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Using the information provided in the question,

Rate of Return (Boom) = (0 + 18 - 25)/25*100 = -28%

Rate of Return (Normal) = (1 + 26 - 25)/25*100 = 8%

Rate of Return (Recession) = (3 + 34 - 25)/25*100 = 48%

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Part 2)

The expected return and standard deviation can be calculated with the use of following formula:

Expected Return = (Sum of Return under 3 Scenarios)/3

Standard Deviation = (Variance)^(1/2)

where Variance = Probability of Boom*(Rate of Return under Boom - Expected Return of Escapist )^2 + Probability of Normal*(Rate of Return under Normal - Expected Return of Escapist)^2 + Probability of Recession*(Rate of Return under Recession - Expected Return of Escapist)^2

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Using the values calculated in Part 1) abover, we get,

Expected Return = (-28 + 8 + 48)/3 = 9.33%

Variance = 1/3*(-28 - 9.33)^2 + 1/3*(8 - 9.33)^2 + 1/3*(48 - 9.33)^2 = 963.56

Standard Deviation = (963.56)^(1/2) = 31.04%

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Part 3)

We will first have to calculated the rate of return of Leaning Tower of Pita under each scenario with the use of formula provided in Part 1)

Rate of Return (Boom) = (8 + 240 - 80)/80*100 = 210%

Rate of Return (Normal) = (4 + 90 - 80)/80*100 = 17.5%

Rate of Return (Recession) = (0 + 0 - 80)/80*100 = -100%

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Now, we can calculate the rate of return under each scenario with 50% investment in both as follows:

Rate of Return (Boom) = 50%*(-28%) + 50%*(210%) = 91%

Rate of Return (Normal) = 50%*(8%) + 50%*(17.50%) = 12.75%

Rate of Return (Recession) = 50%*(48%) + 50%*(-100%) = -26%

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Part 4)

With the use of values calculated in Part 3), we can calculate the expected return and standard deviation of the portfolio as follows:

Expected Return of the Portfolio = (91 + 12.75 - 26)/3 = 25.92%

Variance = 1/3*(91 - 25.92)^2 + 1/3*(12.75 - 25.92)^2 + 1/3*(-26 - 25.92)^2 = 2368.18

Standard Deviation = (2368.18)^(1/2) = 48.66%

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