Question
You make two investments at t=0t=0: Investment A: you purchase stock A for a price of 100. Investment B: you purchase a bond for a
You make two investments at t=0t=0:
- Investment A: you purchase stock A for a price of 100.
- Investment B: you purchase a bond for a price of 100. The bond does not pay out any coupons.
You plan to sell both investments at t=1t=1. The following scenarios apply to outcomes at t=1t=1:
Scenario | Probability of occurrence | Dividend payout of stock A | Price of stock A (after dividend payout) | Price of bond |
---|---|---|---|---|
s=1 | 0.2 | 0 | 60 | 105 |
s=2 | 0.8 | 10 | 120 | 105 |
For all questions below: express your answers as a percent, rounded off to the nearest percent (e.g., if you compute a return/rate/volatility of 0.0785 or 7.85%, fill in 8 in the answer box).
1. Suppose scenario s=1 occurs at t=1. What is the resulting realized return for Investment A?
2.Suppose scenario s=2 occurs at t=1. What is the resulting capital gains yield for Investment A?
3.Suppose scenario s=2 occurs at t=1. What is the resulting dividend yield for Investment A?
4.What is the expected return for Investment A?
5.What is the return volatility for Investment A?
6.What is the risk free rate?
7.Suppose s=2 occurs at t=1. In addition, suppose that the time period between t=0 and t=1 is 2 years. What is the EAR associated with Investment A?
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