Question

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: Dividend Stock Price Boom $2.80 $48 Normal economy 1.80 43 Recession 0.90 34 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.)

Answer 1

Answer:

Expected Return =8.75%   Standard deviation =6.375%

Explanation:

Overall expected return

We calculated the return for all the possibilities normal, boom, recession

boom+normal+recession

(final stock price-initial stock price+dividend)/initial stock price*prop

=[(48-40+2.80)/40*1/3]+[(43-40+1.8)/40*1/3]+[(34-4+0.90)/40*1/3]

=0.09+0.04-0.0425

=0.875/8.75%

expected holding period standard deviation

(overall expected return-return of scenario)^2*prop

(8,75-9)^2*1/3+(8,75-4)^2*1/3+(8,75+4.25)^2*1/3

=0.006387/0.6387%