Calculate the expected holding-period return

Reference no: EM133201061 , Length: 6 Pages

Assignment:

Directions: Make sure you answer all parts thoroughly. Show all your handwritten work. I will not accept types answers. I want to see all the steps. Make sure you draw your graphs.

Label the sections in your work. Make sure you upload a pdf file.

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

Economy Outcome	Probability	Stock Price	Dividend
Boom	10%	$55	$2
Normal Growth	30%	$40	$1
Recession	60%	$35	$0

Section 1:

a. Calculate the expected holding-period return and standard deviation of the holding-period return.

b. Calculate the expected return and standard deviation of a portfolio invested (60%) in Business Adventures and (40%) in Treasury bills. The return on bills is 3%.

c. What is the Sharpe ratio of the complete portfolio constructed in part b.

d. What is the CAL line equation for the complete portfolio?

d. Draw the CAL line for the complete portfolio.

Section 2: Leveraged Portfolio

a. Calculate the expected return and standard deviation of a portfolio invested (160%) in Business Adventures and (-40%) in Treasury bills. The return on bills is 3%.

b. What is the Sharpe ratio of the complete portfolio constructed in part a.

c. What is the CAL line equation for the complete portfolio?

d. Draw the CAL line for the complete portfolio.

Section 3: Answer the following question

Why should investors diversify their investments rather than putting all their money in one stock, such as Amazon? Explain in complete sentences using the knowledge from this chapter.

Reference no: EM133201061

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