1)The Duncan Company's stock is currently selling for $15. People generally expect its price to rise to $24 by the end of next year. They also expect that it will pay a dividend of $0.50 per share during the year.

a)What is the expected return on an investment in Duncan's stock? Round the answer to two decimal places.

b)Recalculate the expected return if next year's price is forecast to be only $17 and the dividend $0.35. Round the answer to two decimal places.

c) Calculate the actual return on Duncan if at the end of the year the price turns out to be $13 and the dividend actually paid was just $0.05. Round the answer to two decimal places. Use minus sign to enter negative answer.

2)Wayne Merritt drives from Cleveland to Chicago frequently and has noticed that traffic and weather make a big difference in the time it takes to make the trip. As a result, he has a hard time planning activities around his arrival time. To better plan his business, Wayne wants to calculate his average driving time as well as a measure of how much an actual trip is likely to vary from that average. To do that, he clocked 10 trips with the results in table.

Driving Time

Number of trips

6 hrs, 0 min

1

6 hrs, 15 min

1

6 hrs, 38 min

2

6 hrs, 48 min

3

7 hrs, 14 min

1

7 hrs, 30 min

1

9 hrs, 20 min

1

1. Calculate the mean, standard deviation, and coefficient of variation of Wayne's driving time to Chicago. (Hint: Treat the 10 trips as the 10 possible outcomes of a discrete probability distribution, each of which has a probability of 0.1.) Do not round intermediate calculations. Round the answers to two decimal places.

Mean _______ Minutes

Standard deviation _______ Minutes

Coefficient of variation _________

1. Calculate the average variation in driving time. Round the answer to two decimal places. (Hint: the average variation is calculated using the formula

E/XI-X over N = ___ Minutes

3) Conestoga Ltd. has the following estimated probability distribution of returns.

Return

Probability

4%

0.20

12%

0.50

14%

0.30

Calculate Conestoga's expected return, the variance and standard deviation of its expected return, and the return's coefficient of variation. Round the answers to four decimal places. Round the variance to six decimal places. (Note: Assume discrete probability distributions for the returns on stocks.)

Expected return:

Variance:

Standard Deviation:

CV:

4)Imagine making choices in the following situation to test the degree of risk aversion. Most people have negative feelings about bearing risk in their investment activities. Someone offers the choice between the following game and a sure thing.

The game: A coin is tossed. If it turns up heads, you get a 1,020,000 dollars.

If tails, you get nothing.

The sure thing: You're given $510,000.

a)What is the expected value of each option?

Game: $

Sure Thing: $

What is the variance of the sure thing?

$

fill in the blank 5

d) Suppose the game is changed to offer a payoff of $1.224 million for a head but still offers nothing for a tail. The sure thing remains $510,000. What is the expected value of each option now?

Game: $

fill in the blank 6

Sure Thing: $

fill in the blank 7

e) Most people will have chosen the sure thing in part (d). Assuming you did too, how much would the game's payoff have to increase before you would choose it over the sure thing?

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