Assume you bought 100 shares of X-Corp on January 1 for $43.75 a share and held
ID: 2776124 • Letter: A
Question
Assume you bought 100 shares of X-Corp on January 1 for $43.75 a share and held the stock for one year. During that period of time you received $1.22 a share in dividends and sold the stock for $47 a share.
Assume you are now considering investing some money in 2 companies that you think will generate the following returns:
Company A
State of the economy
Probability of occurrence
% return given that state
Recession
30%
12%
Stable
60%
18%
Boom
10%
25%
Company B
State of the economy
Probability of occurrence
% return given that state
Recession
30%
9%
Stable
60%
14%
Boom
10%
16%
What is the return of X-Corp over the year?
What is the expected return and standard deviation of Company A?
What is the expected return and standard deviation of Company B?
State of the economy
Probability of occurrence
% return given that state
Recession
30%
12%
Stable
60%
18%
Boom
10%
25%
Explanation / Answer
1) return = (selling price + dividend - purchase price)*100/Purchase price = 10.22%
2)
3)
Scenario Probability Rate of Return =rate of return * probability Actual return -expected return(A) (A)^2* probability Recession 0.3 12 3.6 -4.9 7.203 Stable 0.6 18 10.8 1.1 0.726 Boom 0.1 25 2.5 8.1 6.561 Expected return = sum of weighted return = 16.9 Sum= 14.49 Standard deviation= Standard deviation of stock fund =(sum)^(1/2) 3.806573Related Questions
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