Question

Suppose that the current stock price of Land's Outdoors is $55 per share. Over the next year you expect the following:

State of Land's	Probability	Dividend @ year-end	Stock Price @ year-end
Expansion	25%	$3	$70
Neutral	40%	$1	$60
Contraction	35%	$0	$45

What is the expected return on Land's over the next year? What is the expected risk, as measured by standard deviation, of an investment in Land's over the next year? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expected Return	%
Standard Deviation	%

Answer 1

Return in case of Expansion =(Stock Year End + Dividend-Beginning Price)/Beginning price =(70-55+3)/55 =32.7273%
Return in case of Neutral =(Stock Year End + Dividend-Beginning Price)/Beginning price =(60-55+1)/55 =14.5455%
Return in case of Contraction =(Stock Year End + Dividend-Beginning Price)/Beginning price =(40-55+0)/55=-12.7273%

Expected Return =25%*32.7273%+40%*14.5455%+35%*-12.7273% =9.5454% or 9.54%
Standard Deviation =(25%*(32.7273%-9.5454%)^2+40%*(14.5455%-9.5454%)^2+35%*(-12.7273%-9.5454%)^2)^0.5 =17.83%