The stock of Gadget Corp sells for $40 a share. Its likely dividend payout and end-of-year price depends on the state of the economy by the end of the year as follows:

The interest rate on the risk-free asset is 4% per year. a) Calculate the expected (one-year) holding-period return of Gadget Plus

b) Calculate the standard deviation of the (one-year) holding-period return of Gadget Plus.

c) Bob Bruno did not take FIN650 and holds a portfolio invested 60% in Gadget Plus, 40% in the risk-free asset. Calculate:

c.1) the expected return of Bobs portfolio; c.2) the standard deviation of Bobs portfolio; c.3) the Sharpe Ratio (aka reward-to-variability ratio) of Bobs portfolio.

Scenario Recession Normal Boom Probability 0.20 0.60 0.20 Gadget Corp Dividend 1 2 2 Gadget Corp Stock Price 25 44 50