Question

The stock of Business Adventure currently sells for $40 per share. Its dividend payment and its year-end price depend on the state of the economy as follows:

Dividend Stock Price

Boom $2.00 $50

Normal Economy 1.00 43

Recession 0.50 34

Assume the three states of the economy is equally likely to happen.

Expected Return of the stock this year is: 8.75%

Standard Deviation of the stock return for this year is: 17.91%

Risk premium of business adventures stock is 4.75%

Sharpe Ratio is: 0.266

You’d like to form a portfolio, which consists 60% of the Business Adventure’s stock and 40% of the Treasury bill. Calculate the expected return of such a portfolio and the standard deviation of such a portfolio.

Answer 1

ALL STATISTICAL FORMULAS, NO EXCEL FUNCTION IS USED.

EXPECTED RETURN ON PORTFOLIO : SEE SECOND IMAGE = 6.85%, STANDARD DEVIATION = 10.73%