Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Imagine a given capital market where a risk-free asset with a return, rf, of 6% per period is traded. On the given capital market, the

Imagine a given capital market where a risk-free asset with a return, rf, of 6% per period is traded. On the given capital market, the only assets traded, besides the risk-free, are stocks in firm A, firm B and firm C. Thus, no other risky assets are traded on the capital market. The price today (t = 0) of a stock in A is DKK 50. On the capital market, all participants agree that in one period (to time t = 1) there are only 4 possible states for the value of stock A, cf. table 2.1 below:

State Probability Price at t= 1 in firm A
1 0,15 47,00
2 0,15 44,50
3 0,30 43,50
4 0,40 45,00

No matter which state is realized, a dividend of DKK 10 per stock in firm A is paid in the next period (after t = 0 and before t = 1). The realized return of stock B in the next period, for the states, is given in table 2.2 below:

State Realized return of stock B in next period
1 -0,0700
2 0,1300
3 0,1500
4 0,0800

Calculate the expected return and the variance of the return in the next period, for firm A and B.

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_2

Step: 3

blur-text-image_3

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

Cornerstones Of Financial Accounting

Authors: Bertrand Piccard, Jay Rich, Jeff Jones, Maryanne Mowen, Don Hansen, Nick Jones

1st Edition

0324657730, 9780324657739

More Books

Students also viewed these Finance questions

Question

4. How would you deal with the store manager?

Answered: 1 week ago