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 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?
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