The common stock of Escapist Films sells for $39 a share and offers the following payoffs...

The common stock of Escapist Films sells for $39 a share and offers the following payoffs next year:

	Probability	Dividend	Stock Price
Boom	0.4	$0	$20
Normal economy	0.4	$2	$30
Recession	0.2	$7	$44

Calculate the expected return and standard deviation of Escapist. (Round your answers to 2 decimal places. Use the minus sign for negative numbers if it is necessary.)

Expected rate of return %

Standard deviation %

The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year:

	Probability	Dividend	Stock Price
Boom	0.4	$6	$200
Normal economy	0.4	$2	$116
Recession	0.2	$0	$4

The stock is selling today for $95.

Calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita. (Round your answers to 2 decimal places. Use the minus sign for negative numbers if it is necessary.)

Expected return of portfolio %

Standard deviation of portfolio %

Why is the portfolio standard deviation lower than for either stock’s individually?

The portfolio standard deviation is lower than for either stock’s individually because

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

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