Problem 11-16 Scenario Analysis (LO3)

The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year:

		Dividend				Stock Price
Boom		$	0			$	18
Normal economy			1				26
Recession			3				34

The common stock of Leaning Tower of Pita Inc. is selling for $80 and offers these payoffs next year:

		Dividend				Stock Price
Boom		$	8			$	240
Normal economy			4				90
Recession			0				0

Required:

a-1. Calculate the rate of return of Escapist Films for each economic state.

a-2. Calculate the expected return and standard deviation of Escapist if all three economic scenarios are equally likely to occur.

b-1. Calculate the rate of return of a portfolio half invested in Escapist and half in Leaning Tower of Pita for each economic state.

b-2. Calculate the expected rate of return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita. All three economic scenarios are equally likely to occur.