16. Scenario Analysis. The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year: (LO11-3) Dividend Stock Price Boom $0 $18 1 Normal economy Recession 26 34 3 a. Calculate the expected return and standard deviation of Escapist. All three scenarios are equally likely b. Now calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita (from Problem 15). Show that the portfolio stan- dard deviation is lower than that of either stock. Explain why this happens. You may need QP11.15 to complete this question. 15. Scenario Analysis and Portfolio Risk. The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors next year, which depend on the state of the economy, as follows: (LO11-2 and L011-3) Boom Normal economy Recession Dividend $8 4 0 Stock Price $240 90 0 a. The company goes out of business if a recession hits. Calculate the expected rate of returi and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simpli ity that the three possible states of the economy are equally likely. The stock is selling todas for $80. b. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment--the owner of a gambling casino or a successful bankruptcy lawyer? Explain. 16. Scenario Analysis. The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year: (LO11-3) Dividend Stock Price Boom $0 $18 1 Normal economy Recession 26 34 3 a. Calculate the expected return and standard deviation of Escapist. All three scenarios are equally likely b. Now calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita (from Problem 15). Show that the portfolio stan- dard deviation is lower than that of either stock. Explain why this happens. You may need QP11.15 to complete this question. 15. Scenario Analysis and Portfolio Risk. The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors next year, which depend on the state of the economy, as follows: (LO11-2 and L011-3) Boom Normal economy Recession Dividend $8 4 0 Stock Price $240 90 0 a. The company goes out of business if a recession hits. Calculate the expected rate of returi and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simpli ity that the three possible states of the economy are equally likely. The stock is selling todas for $80. b. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment--the owner of a gambling casino or a successful bankruptcy lawyer? Explain
