Pearson eText Foundations of Finance -- Instant Access (Pearson+)
Pearson eText Foundations of Finance -- Instant Access (Pearson+)
10th Edition
ISBN: 9780135639382
Author: Arthur Keown, John Martin
Publisher: PEARSON+
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Chapter 6, Problem 5MC
Summary Introduction

To determine: The monthly holding period return.

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You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below. Probability 0.1 0.2 0.4 0.3 a. Compute the expected return for stock X and for stock Y. The expected return for stock X is (Type an integer or a decimal. Do not round.) Economic Condition Recession Slow growth Moderate growth Fast growth Returns Stock X Stock Y - 40 30 80 150 - 110 40 140 210
a) Assume that you bought 200 stock B in your portfolio for total investment of $1200, now the market price of the stock is $75, the dividend paid for this stock is $2 each year. How much is the capital gain of this stock? b) Assume that the following data available for the portfolio, calculate the expected return, variance and standard deviation of the portfolio given stock A accounts for 45% and stock B accounts for 55% of your portfolio?   A B Expected return 12.50% 18.50% Standard Deviation of return 15% 20% Correlation of coefficient (p) 0.4
2. Answer both questions:            a. You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end. What is the rate of return on your investment if the year-end stock prices turn out to be $38, $40, and $42? What is your real (inflation-adjusted) rate of return in each case, assuming an inflation rate of 3%?            b. Consider the following information on the returns on stock and bond investment.           Scenario Profitability Stocks Bonds Recession .2 -5% +14% Normal Economy .6 +15% +8% Boom .2 +25% +4%                      i) Calculate the expected rate of return and standard deviation in each investment.                      ii) Do your results support or contradict the historical record on the relationship between risk and return in the financial market in both Canada and the United States?                     iii) Which investment would you prefer? Explain your answer.
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