Question
1) A stock is expected to return 8% in a normal economy, 14% if the economy booms, and lose 5% if the economy moves into
1) A stock is expected to return 8% in a normal economy, 14% if the economy booms, and lose 5% if the economy moves into a recessionary period. The economists predict a 68% chance of a normal economy, a 17% chance of a boom, and a 15% chance of a recession. What is the expected return on the stock? $___
2) Jefferson's recently paid an annual dividend of $8 per share. The dividend is expected to decrease by 1% each year. How much should you pay for this stock today if your required return is 14%? $____
3)The nomial rate of return is __% earned by an investor in a bond that was purchased for $902, has an annual coupon of 3%, and was sold at the end of the year for $1028? Assume the face value of the bond is $1,000.
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