Directions: You MUST show ALL of your work to receive credit on the problems. There will be significant point reductions if you do not show your work. All calculations should be completed to at least 2 decimal places.

1) The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors next year, which depend on the state of the economy, as follows:

	Dividend	Stock Price
Boom	$8	$240
Normal Economy	4	90
Recession	0	0

The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $80.

2) Calculate the nominal return, real return, nominal risk premium, and real risk premium for the following common stock investment: (Show your work)

Purchase Price	$60 per share
Dividend	$3.50 per share per year
Sale Price	$73 per share
Holding Period	1 year
Treasury bill yield	8.5%
Inflation Rate	7.5%

3) How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks. Assume the historic real returns of 2.1% annually for bonds and 9.3% for common stocks.