Kate recently invested in real estate with the intention of selling the property one year from today. she has modeled the return
s on that investment based on three economic scenarios. she believes that if the economy stays healthy, then her investment will generate a 30 percent return. however, if the economy softens, as predicted, the return will be 10 percent, while the return will be -25 percent if the economy slips into a recession. if the probabilities of the healthy, soft, and recessionary states are 0.5, 0.3, and 0.2, respectively, then what are the expected return and the standard deviation of the return on kate's investment?
1 answer:
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Answer:
The present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent is $6.57
Explanation:
Solution:
Given that
The present value =∑ ⁿ t=1 cf/ (1 +r)t
where cf= cash flow
r =the required rate of return
t = the number of years
Now
The present value will be:
cf₁/(1+r)^1 + cf₂/(1 +)^2 + cf₃/(1+r)3 + cf₄/(1 +r)^4) + cf₅/(1 +r)^5 + cf₆/(1+r)^6
Hence,
cf₁, cf₂ cf₃ = 0 as the firm does not expect to pay dividend in the next three years
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