Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You may write your answers in percentage values where applicable, though in that case the % symbol should be clearly stated. You may round your
You may write your answers in percentage values where applicable, though in that case the % symbol should be clearly stated. You may round your final answer to 4 decimal place (or equivalently, to 2 decimal place if it is a percentage value). Throughout this section, you may use the fact that (a + b)2 = a? + b2 + 2ab and (a - b)2 = a + b2 - 2ab 12. Suppose a stock had the closing price of $ 100 (i.e. 100 USD) today. A reputable investment analyst claims that she expects the stock will have the following possible one- year prices and dividend payments below, depending on whether the market turns out to be great, good, poor, or very bad. The stock pays dividend at the end of the one-year holding period. Market Dividends Probability 0.25 Great Good 0.4 End Price $ 131.0 $ 118.5 $ 80.5 $ 44.0 $ 4.0 $ 3.5 $ 2.5 $ 1.0 0.25 Poor Very bad 0.1 a. Calculate the one-year Holding Period Returns (HPR) of the stock for each four scenario. (2 Marks) b. Supposing that the investment analyst's claim is true, what are the expected returns and the risk (measured by the return variance) of the investment on this stock? (3 Marks) c. State if the following statement is True or False (no explanations needed): Returns on this stock is not a random variable because the probabilities of its future values are known." (2 Marks) d. Calculate the risk premium and the Sharpe ratio of the stock when the risk-free rate is 3%, and briefly explain what they mean
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started