Question

The stock of Business Adventures sells for $60 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	$2.00	$73
Normal economy	1.50	63
Recession	0.70	59

a. 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.)

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 4%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Ans:-

(b)Treasury bill return is given 4%. If 50% is invested in Business Adventure and 50% in treasury Bill, then

Expected Return = 0.50 * 0.1056 + 0.50 *0.04 = 0.0728 = 7.28%.

The standard deviation will be 0.50*0.1060 =0.0530 = 5.30%. (SInce Treasury Bill is Risk-free, therefore, SD will not be counted for Treasury bill in the portfolio.

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