Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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% -15%

Given the above choices, calculate and answer

: i). What is the single period expected return for Security A & Security B, respectively?

ii). 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?

iii). What is the mean and standard deviation of the holding period return for Security C?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Sustainable Value Creation An Inevitable Challenge To Business And Society

Authors: Teun Wolters

1st Edition

3031353501, 978-3031353505

More Books

Students also viewed these Finance questions