Principles Of Finance

Chapter 7 Risk Analysis

Alternative Assignment 7

1.Problem 2.

2a. Find the expected return and standard deviation of each stock.

ProbabilityReturn of Stock CReturn of Stock D

0.30-10%25%

0.5015%10%

0.2040%0%

2b.

Calculate the expected return and standard deviation of a portfolio made up of 50% stock C and 50% stock D if the correlation is 0-75.

2c. Would you prefer to put your money in stock C, stock D or the 50/50 portfolio? Explain.

2.Problem 5.

We are purchasing a stock that just paid a dividend (D0) of $1.50. The growth rate in dividends for this stock is 4% and it has a beta of 1.3. The expected return on the market is 12% and the current Treasury rate is 7%. How much should we pay for this stock?