ESSEN OF INVESTMENTS CONNECT AC
11th Edition
ISBN: 9781266650314
Author: Bodie
Publisher: MCG
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Chapter 5, Problem 6PS
The stock of Business Adventures sells for $40 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: (LO 5-2)
Dividend Stock Price
Boom $2.00
50
Normal economy 1 00 43
Recession 0.50 34
a. Calculate the expected holding-period return and 4andard deviation of the holding-period return. All three scenarios are equally likely.
b. Calculate the expected return arid standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.
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Problem 2. The stock of Business Adventures sells for $40 a share. Its
likely dividend payout at the end-of-year price depends on the state of the
economy by the end of the year as follows:
State of the Economy Stock Price
Recession
Normal Growth
Boom
$34
$43
$50
Dividend
$ 0.50
$ 1.00
$ 2.00
(a) Calculate the expected holding-period return and standard deviation
of the return. All three scenarios are equally likely.
(b) Calculate the expected return and standard deviation of a portfolio
invested half in Business Adventures and half in Treasury Bills. The
return on Treasury Bills is 4%.
=
(c) Assume your utility function is U(u, o) = μ-302. How much would
you invest in the stock and how much would you invest in T-Bills?
Suppose your expectations regarding the stock price are as follows:
HPR
(including
dividends)
50.5%
20.5
-18.5
State of the Market
Boom
Normal growth
Recession
Probability
0.20
0.22
0.58
Mean
Standard deviation
-
Use the equations E (r) = Ep (s) r(s) and o² = Ep (s) [r(s) — E(r)]² to compute the mean and standard deviation of the HPR on
S
S
stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Ending
Price
$ 140
110
80
%
%
Suppose your expectations regarding the stock price are as follows:
State of the
Market
Boom
Normal growth
Recession
Probability Ending Price
0.21
$ 140
0.30
110
0.49
80
Use the equations E (r) = Ep (s) r(s) and o² = Ep (s) [r(s) - E(r)]² to compute the mean and standard deviation of the HPR on
S
S
HPR
(including
dividends)
50.5%
18.0
-12.5
stocks.
Note: Do not round intermediate calculations. Round your answers to 2 decimal places.
Mean
Standard deviation
Answer is complete but not entirely correct.
13.65 %
20.48 %
Chapter 5 Solutions
ESSEN OF INVESTMENTS CONNECT AC
Ch. 5 - Prob. 1PSCh. 5 - The real interest rate approximately equals the...Ch. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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