Question

A) Consider the following two, completely separate economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together-in good times all prices rise together and in bad times, they all fall together. In the second economy, stock returns are independent-one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.

B) You bought a stock a year ago for $50 per share and sold it today for $55. It paid a $1 dividend yesterday.

1. What was your realized return?

2. How much of the return came from the dividend yield and how much came from the capital gain?

3. The same scenario as above, but the stock fell to $45 per share.

a. What is the dividend yield now?

b. What is the capital gain now?

Answer 1

ANSWER:-

1.) i would choose the second one in which each stock is independent of other because in this choice my risk will be diversified and there is good chance of not loosing my money.

2.)the realized return is 12percent - (stock value appreciation plus divident earned = 1+5 = $6 on $50 invested which comes to 12percent)

3.) the dividend yield is 2 percent. capital loss is $5. there is no capital gain.