Need help on #16

wer of Pita Inc., a Chapter 11 Introduction to Risk, Return, and the Opportunity Cost of Capital 15. Scenario Analysis and Portfolio Risk. The common stock of Leaning Tower of Pita restaurant chain, will generate payoffs to investors next year, which depend on the state of economy, as follows: (LO11-2 and LO11-3) 359 Dividend $8 Stock Price $240 Dividend Boom Normal economy Recession 90 Boom Normal economy Recession Stock Price $18 26 34 a. The company goes out of business if a recession hits. Calculate the expected rate of retur and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplic ity that the three possible states of the economy are equally likely. The stock is selling today! for $80. b. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment une owner of a gambling casino or a successful bankruptcy lawyer? Explain. 16. Scenario Analysis. The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year: (LO11-3) a. Calculate the expected return and standard deviation of Escapist. All three scenarios are equally likely. b. Now calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita (from Problem 15). Show that the portfolio stan- dard deviation is lower than that of either stock. Explain why this happens. wer of Pita Inc., a Chapter 11 Introduction to Risk, Return, and the Opportunity Cost of Capital 15. Scenario Analysis and Portfolio Risk. The common stock of Leaning Tower of Pita restaurant chain, will generate payoffs to investors next year, which depend on the state of economy, as follows: (LO11-2 and LO11-3) 359 Dividend $8 Stock Price $240 Dividend Boom Normal economy Recession 90 Boom Normal economy Recession Stock Price $18 26 34 a. The company goes out of business if a recession hits. Calculate the expected rate of retur and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplic ity that the three possible states of the economy are equally likely. The stock is selling today! for $80. b. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment une owner of a gambling casino or a successful bankruptcy lawyer? Explain. 16. Scenario Analysis. The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year: (LO11-3) a. Calculate the expected return and standard deviation of Escapist. All three scenarios are equally likely. b. Now calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita (from Problem 15). Show that the portfolio stan- dard deviation is lower than that of either stock. Explain why this happens