Question

Question 4 (10 marks A stock sells for $70 a share. Its dividend payout and end-of-year price depend on the state of the economy as follows: Boom Normal Recession Dividend $2.00 $1.00 $0.50 Stock Price $80 $73 $40 Assume all three scenarios are equally likely. Give your answers in 4 d.p. (a) Calculate the holding period returns for each scenarios respectively. (b) Calculate the expected holding-period return. (c) Calculate the standard deviation of the holding-period return.

Answer 1

A B C D (a) Probbility Dividend StockPrice Holding Period Return =p*(R-E[R])^2 0.33332 80 17.1429% 1.8520% 0.3333 1 73 5.7143% 0.4915% 0.3333 0.5 40 - 42.1429% 4.2517% 3 Boom 4 Normal 5 Recession (b) Expected Holding Period Return = -6.4286% {c} Standard Deviation of Holding Period Return = 25.6812%

А Probbility 2 3 Boom =1/3 4 Normal =1/3 5 Recession =1/3 Dividend StockPrice 280 1 73 0. 5 40 (a) Holding Period Return =(D3+C3-70)/70 =(D4+C4-70)/70 =(D5+C5-70)/70 =p*(R-E[R])^2 =B3*(E3-$E$7)^2 =B4* (E4-$E$7)^2 =B5*(E5-$E$7)^2 7 (b) Expected Holding Period Return = -SUMPRODUCT(B3:35,E3:E5) {c} Standard Deviation of Holding Period Return = =SUM(F3:F5)^0.5

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