Question

The stock of Business Adventures sells for $45 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Dividend $2.60 1.50 0.60 Stock Price $55 Boom Normal economy Recession 39 a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 5%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B C D | G Current Price of Stock $45.00 In a year Economy Boom Normal Recession Probability 33.33% 33.33% 33.33% Dividend $2.60 $1.50 $0.60 Stock Price $55.00 $48.00 $39.00 Return 28.00% 10.00% -12.00% 10 a. Expected Return Standard deviation 8.67% 16.36% 11 12 13 b. 14 Weight Portfolio Business Adventures Treasury bills 50% (r) 8.67% 5.00% Std. Dev. 16.36% 0.00% 50% 16 17 Expected Return Standard deviation 6.83% 8.18%

Cell reference -

А в ID E F Current Price of Stock 45 Probability In a year Economy Boom Normal Recession =1/3 =1/3 =1/3 Dividend Stock Price 12.6 55 1.5 Return =((E6-$C$2)+D6)/$C$2 =((E7-$C$2)+D7)/$C$2 =((E8-$C$2)+D8)/$C$2 48 39 -SU urn =SUMPRODUCT(C6:C8,F6:F8) =SQRT(SUMPRODUCT((C10-F6:F8)^2,06:08)) 10 a. Expected Return 11 Standard deviation 12 13 b. Portfolio 14 Business Adventures 15 Treasury bills Weight 0.5 Er) =C10 0.05 Std. Dev. =C11 0 0.5 Expected Return Standard deviation =SUMPRODUCT(C14:C15, D14:D15) =C14*E14 19 20

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