Calculate the expected return and standard deviation

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

 

Dividend

Stock price

  Boom

$2.00

$54

  Normal economy

1.20

48

  Recession

.95

39

 

a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

  Expected return

%

  Standard deviation

%

 

b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

  Expected return

%

  Standard deviation

Solution:

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