Question

Suppose stock X has a price of $100 today. There are three possible scenarios one year later as detailed below. Let R denote the one-year return of stock X (today to one year later).

Scenario 1 Probability 20% Stock price $80 Dividend $0

Scenario 2 Probability 50% Stock price $105 Dividend $140

Scenario 3 Probability 0% Stock price $5 Dividend $5

Calculate: (a) R in each of these three scenarios. 1 (b) The volatility of R

Answer 1

In Scenerio 3.Probability should be 30% in my opinion so I have solved the Question accordingly.If its not let me know in comment section,I will do it again with Probability 0%.

Formulae used-

1.Holding period return = (Price at year end +dividend -Price at year beginning)/Price at year beginning

2.Standard deviation= sqrt(Variance)

3.Expected Return = Sum of ( Holding period returns*Probability)

4.Variance = Sum of ((Holding period return -Expected return)^2*Probability)

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