Question
PLEASE ANSWER ALL PARTS: PART A: A stock just paid an annual dividend of $2. The dividend is expected to grow by 8% per year
PLEASE ANSWER ALL PARTS:
PART A:
A stock just paid an annual dividend of $2. The dividend is expected to grow by 8% per year for the next 3 years. The growth rate of dividends will then fall steadily (linearly) from 8% after 3 years to 5% in year 6.
The required rate of return is 12%.
What is the value of the stock if the dividend growth rate will stay 0.05 (5%) forever after 6 years?
In 6 years, the P/E ratio is expected to be 19 and the payout ratio to be 80%. What is the value of the stock when using the P/E ratio?
PART B:
The return statistics for two stocks and T-bills are given below:
A | B | C | D | |
1 | Stock A | Stock B | T-bills | |
2 | Expected return | 0.094 | 0.065 | 0.02 |
3 | Variance | 0.1024 | 0.0729 | |
4 | Standard deviation | 0.32 | 0.27 | |
5 | Covariance | 0.02592 |
What is the Sharpe ratio of a portfolio with 50% invested in stock A and the rest in stock B?
PART C:
The return statistics for two stocks and T-bills are given below:
A | B | C | D | |
1 | Stock A | Stock B | T-bills | |
2 | Expected return | 0.094 | 0.073 | 0.02 |
3 | Variance | 0.1225 | 0.0729 | |
4 | Standard deviation | 0.35 | 0.27 | |
5 | Covariance | 0.02835 |
What is the Sharpe ratio of a portfolio with 80% invested in stock A and the rest in stock B?
What is the Sharpe ratio of the optimal risky portfolio?
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