Question
onsider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession .20 8 % 16 % Normal economy .50 19 9 Boom .30
onsider the following scenario analysis: |
Rate of Return | |||||
Scenario | Probability | Stocks | Bonds | ||
Recession | .20 | 8 | % | 16 | % |
Normal economy | .50 | 19 | 9 | ||
Boom | .30 | 25 | 6 |
a. | Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? | ||
|
b. | Calculate the expected rate of return and standard deviation for each investment.(Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) |
Expected Rate of Return | Standard Deviation | |
Stocks | % | % |
Bonds | % | % |
Top hedge fund manager Diana Sauros believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $43. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.8%. |
Average rates of return on Treasury bills, government bonds, and common stocks, 19002013 (figures in percent per year) are as follows. |
Portfolio | Average Annual Rate of Return | Average Premium (Extra return versus Treasury bills) | |||
Treasury bills | 3.9 | ||||
Treasury bonds | 5.2 | 1.3 | |||
Common stocks | 11.5 | 7.6 |
What is the discount rate on the stock?(Enter your answer as a percent rounded to 2 decimal places.) |
Discount rate | % |
What price should she be willing to pay for the stock today?(Do not round intermediate calculations.Round your answer to 2 decimal places.) |
Stock price | $ |
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