Rio Tinto Limited's ordinary shares last paid a dividend of 65 cents. Their dividend is expected to grow at 8% for 3 years and then grow at 5% from then onwards. The required return on their ordinary shares is 12%.

i)Draw the timeline of this scenario.(4 marks)

ii)What is the current value of a share?(6 marks)

Use the information in the table below for questions b) to e). The annual rate of return and related probabilities for each security are given.

Stock A

Stock B

Rate of Return

Probability

Rate of Return

Probability

10%

30%

5%

25%

14%

35%

15%

30%

18%

35%

25%

45%

b. Calculate the expected rate of return,E(R), for each stock.(2 marks)

c. Calculate the standard deviation,, for each stock.(4 marks)

d. Which stock should you purchase?Explain why you make such choice.(3 marks)

e. Imagine that you will make a portfolio that consists of 60% of Stock A and 40% of Stock B, assuming thecorrelation coefficientbetween A and B (A,B) is -0.35. Based on the answer you obtained fromb) and c),calculate the expected return,E(RP), and standard deviation,P, of your portfolio.(6 marks)