Question

*PLEASE SHOW ALL WORK FOR EVERY QUESTION*

QUESTION 1:

An investor purchased a bond one year ago for $980. He received $17 in interest and sold the bond for $987. What is the holding-period return on his investment?

Note: Express your answer as a percentage with no percentage sign.

QUESTION 2:
The stock of company XYZ currently trades at $190 and just paid a dividend of $3.8. Suppose that your expectations regarding the stock price and dividends next year are as follows:

State of the market	Probability	Dividend	Price
Boom	0.35	$4	$240
Normal	0.55	$4	$200
Recession	0.10	$0	$120

A: Compute the expected rate of return of XYZ. Express your answer as a percentage with two decimals and no percentage sign.

B: Compute the standard deviation of the rate of return of XYZ. Express your answer as a percentage with two decimals and no percentage sign.

Answer 1

Question 1:

Holding Period Return= (P1-P0+I)/P0

Where P1= End price, P0=Beginning price and I= Interest received

Given, P0= $980, P1= $987 and Interest = $17

Holding Period Return= (987-980+17)/980 = 2.449

Question 2:

Holding Period Return= (P1-P0+D)/P0

Where P1= End price, P0=Beginning price and D= Dividend received

Return if state of economy is boom= (240-190+4)/190 = 28.4211%

Return if state of economy is Normal= (200-190+4)/190 = 7.3684%

Return if state of economy is Recession= (120-190+0)/190 = -36.8421%

(A ).   Expected rate of return of XYZ= 10.32

(B ).   Standard deviation of rate of return on XYZ= 18.49

Details of calculation as follows: