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1. (Bodie Ch 5, Pr 6) The stock of Business Adventures sells for $65 a share. Its likely dividend payout and end-of-year price depend on the sate of the economy by the end of the year as follows:

Dividend                             Stock Price
Boom $2.40                       $73
Normal Economy $1.60   $66
Recession $0.85             $57


a. Calculate the expected holding period return and standard deviation of the holding period return. All three scenarios are equally likely.
b. 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 3%.

home / homework help / questions and answers / business / finance / 1. (bodie ch 5, pr 6) the stock of business adventures ... 1. (Bodie Ch 5, Pr 6) The stock of Business Adventures sells for $65 a share. Its likely dividend payout and end-of-year price depend on the sate of the economy by the end of the year as follows: Dividend Stock Price Boom $2.40 $73 Normal Economy $1.60 $66 Recession $0.85 $57 a. Calculate the expected holding period return and standard deviation of the holding period return. All three scenarios are equally likely. b. 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 3%. icn-search-close-15x15.png Ask a new question? Question in Finance Anonymous asked on October 2, 2012 Want an answer? Report abuse icn-search-box-30x30.png

Explanation / Answer

purchase price: $52
you receive the dividend and the sale price...
(div + sale price - purchase price) / purchase price = HPR
3 + 62 - 52 = 13.../52 = 0.25
2 + 55 - 52 = 5.../52 = 0.09615
1.50 + 46 - 52 = 47.50.../52 = (0.08654) < parenthesis for negative HPR
Expected return is the sum of all : probability of return * return
with equal probabilities: 1.0/3 = 0.3333 <probability of each return
E(r) = 0.3333(0.25) + 0.3333(0.09615) + 0.3333(-0.08654) = 0.08654
Variance: sum for all: probability of return * (return - E(r))^2
e.g. sum all scenarios, example: 0.3333(0.25 - 0.08654)^2

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