Calculate The Expected Holding-period Return And Standard Deviation Of The Holding-period Return. All Three Scenarios Are Equally Likely. B. Calculate The Expected Return And Standard Deviation Of A Portfolio Invested Half In Business Adventures And Half

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Bodie-Kane-Marcus: Essentials of Investments, Fifth Edition

II. Portfolio Theory

5. Risk and Return: Past and Prologue

© The McGraw-H Companies, 2003

Part TWO Portfolio Theory

Use Equations 5.3-5.5 to compute the mean and standard deviation of the HPR on stocks. Compare your revised parameters with the ones in the text.

5. 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

Normal economy 1.00 43

Recession .50 34

a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely.

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%.

Use the following data in answering questions 6, 7, and 8.

Utility Formula Data

Expected Standard

Investment Return E(r) Deviation a

6. Based on the utility formula above, which investment would you select if you were risk averse with A = 4?

7. Based on the utility formula above, which investment would you select if you were risk neutral?

8. The variable (A) in the utility formula represents the:

a. investor's return requirement.

b. investor's aversion to risk.

c. certainty equivalent rate of the portfolio.

d. preference for one unit of return per four units of risk.

Use the following expectations on Stocks X and Y to answer questions 9 through 12 (round to the nearest percent).

Bodie-Kane-Marcus: Essentials of Investments, Fifth Edition

II. Portfolio Theory

5. Risk and Return: Past and Prologue

© The McGraw-H Companies, 2003

5 Risk and Return: Past and Prologue

Bear Market Normal Market Bull Market

Probability 0.2 0.5 0.3

9. What are the expected returns for Stocks X and Y?

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Responses

  • Girma
    How to calculate the mean of HPR of stock?
    3 years ago
  • corey
    How do you compute the mean of the HPR on stocks?
    3 years ago
  • pietro buccho
    How to calculate standard deviation from holding period?
    6 months ago

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