Question
Assume you have $1 million Cash and are trying to choose among three securities to invest. a . Security A is a price weighted index
Assume you have $1 million Cash and are trying to choose among three securities to invest.
a. Security A is a price weighted index of the following three stocks with the corresponding price information in period 0 and period 1 (assume the initial index divisor is 3):
Stock | Initial date (t=0) | Final Date (t=1) | |
| Price | Shares Outstanding | Expected Price |
A1 | $20 | 100 | $25 |
A2 | $30 | 500 | $30 |
A3 | $40 | 600 | $44 |
b. Security B is a value weighted index of the following three stocks with the corresponding price information in period 0 and period 1 ((assume the initial index divisor is 100):
Stock | Initial date (t=0) | Final Date (t=1) | |
| Price | Shares Outstanding | Expected Price |
B1 | $50 | 800 | $100 |
B2 | $60 | 500 | $80 |
B3 | $70 | 600 | $60 |
c. Security C is a single security with the following expectations:
State of the Market | Probability | Final Date (t=1) Ending Price | Holding Period Return (Including dividends; From t=0 to t=1) |
Boom | 0.4 | $200 | 25% |
Normal | 0.4 | $180 | 10% |
Recession | 0.2 | $150 | -15% |
Given the above answer:
a). What is the single period expected return for Security A & Security B, respectively?
b). What is the single period expected return for Security A if stocks A1 and A2 were to split 2 for 1 and 4 for 1, respectively, after period 0?
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