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ABC corporation has a current stock price of $50. Over the next year its price will rise 10% with probability 0.6 (State 1), and it
ABC corporation has a current stock price of $50. Over the next year its price will rise 10% with probability 0.6 (State 1), and it will fall 5% with probability 0.4 (State 2). In addition, it will pay a dividend of D = $3 at the end of the next year. Hint: Express holding period returns for State 1 and State 2, respectively. Say = R1 = H PR(State) P1(Statei) + D P. P. Pi(State2) + D Po Po R2 = HPR(Statez) = = And, weight with the relevant probability. a) (20 pt*] Compute the mean and variance of the holding period return on ABC over the next year. b) (10 pt*] If Mike invests his wealth $10,000 in the stock of ABC, compute Mike's expected wealth at the end of one year. c) (10 pt] Jane, who is a good friend of Mike, asks Mike to lend her $10,000, and in return, she pays back $10,500 a year later. As a collateral, Jane gives Mike her car which is roughly worth $15,000. Mike decided to give Jane money instead of investing in the ABC stock. Explain Mike's behavior
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