Question
(a) True or False: Assume that you can invest an equal dollar amount in five different securities. Holding all else equal, the benefits of
(a) True or False: " Assume that you can invest an equal dollar amount in five different securities. Holding all else equal, the benefits of diversification are greatest if the returns for your five securities have correlation coefficients that are close to 1."
(b)" You expect Budweiser will pay dividends of 1.50 in one year, 2.50 in two years, and 3.50 in three years. From that point onwards, dividends will grow at 6% per year. Investors' required rate of return is 12%. According to the Dividend Discount Model, what should be Budweiser's stock price?"
(c) Assume that you formed a portfolio by investing $15,000 in Bank America and $20,000 in the S&P 500. Below is information on three states of nature and the return that you would see over the next year from each security in each state of nature. What will be the expected return for your portfolio?
Probability of "state" | Bank of America | S&P 500 |
1/3 | .13 | .06 |
1/3 | -.08 | .12 |
1/3 | .28 | .18 |
a. | .1157 | |
b. | .1209 | |
c. | .1224 | |
d. | .1249 | |
e. | .1182 |
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