Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possiblecircumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated returnexpected to result during each state of nature by its probability of occurrence.Consider the following case:David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters ofDavid's portfolio value consists of FF's shares, and the balance consists of PP's shares.Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks indifferent market conditions are detailed in the following table:Market Condition Probability of Occurrence Falcon Freight Pheasant Pharmaceuticals0.200.350.45StrongNormalWeak40%24%-32%56%32%-40%Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the threepossible market conditions next year.The expected rate of return on Falcon Freight's stock over the next year is • The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is• The expected rate of return on David's portfolio over the next year isThe expected returns for David's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time totime, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuousprobability distribution graph.For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph:PROBABILITY DENSITY-40-200Company ACompany B20RATE OF RETURN (Percent)4060

Probability distribution of returns on two stocks have been provided. We need to find the expected…

David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence 0.20 0.35 0.45 Strong Normal Weak Falcon Freight Pheasant Pharmaceuticals 40% 24% -32% 56% 32% -40% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the th possible market conditions next year. • The expected rate of return on Falcon Freight's stock over the next year is

David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence 0.20 0.35 0.45 Strong Normal Weak Falcon Freight Pheasant Pharmaceuticals 40% 24% -32% 56% 32% -40% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the th possible market conditions next year. • The expected rate of return on Falcon Freight's stock over the next year is

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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David owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of David’s portfolio value consists of HDS’s shares, and the balance consists of BSB’s shares. Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Happy Dog Soap Black Sheep Broadcasting Strong 0.20 22.5% 31.5% Normal 0.35 13.5% 18% Weak 0.45 -18% -22.5% Calculate expected returns for the individual stocks in David’s portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year. • The expected rate of return on Happy Dog Soap’s stock over the next year is . • The expected rate of return on Black Sheep Broadcasting’s stock over the next year is . • The expected rate…
Mick's Enchiladas has preferred stock outstanding that pays a dividend of $7 at the end of each year. The preferred sells for $85 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)?
An investor has analyzed a stock for a one-year holding period. There is a fifty-fifty chance that the stock, currently selling at Tk. 60, will sell for Tk. 55 or Tk. 70 by the year end. The investor can borrow on 40 percent margin from his bank at 10 per cent per annum. (a) What is the investor's expected holding period yield and risk if he buys 100 shares and does not borrow? (b) What would be his expected yield and risk if he buys 200 shares paying 60 per cent of the cost with borrowed funds?
Keith holds a portfolio that is invested equally in three stocks (wDwD = wAwA = wIwI = 1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return DET 0.7 25% 8.0% AIL 1.0 38% 10.0% INO 1.6 34% 13.5% An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst’s expected return estimates may or may not equal the stocks’ required returns. The risk-free rate [rRFrRF] is 6%, and the market risk premium [RPMRPM] is 4%. Use the following graph with the security market line (SML) to plot each stock’s beta and expected return. (Note: Click on the points on the graph to see their coordinates.) Stock DETStock AILStock INO00.20.40.60.81.01.21.41.61.82.020181614121086420RATE OF RETURN (Percent)RISK (Beta) A stock is in equilibrium if its required return its expected return. In general, assume that markets and stocks are in equilibrium (or fairly valued),…
Suppose you purchase one share of the stock of Red Devil Corporation at the beginning of year 1 for $43.00 At the end of year 1, you receive a dividend of $2, and buy one more share for $47.00. At the end of year 2, you receive total dividends of $4 (e., $2 for each share), and sell the shares for $55.00 each. What is the time-weighted return on your investment? (Round your answer to 2 decimal places. Do not round intermediate calculations.) Return 1%
Melissa Cutt is thinking about buying some shares of EZLawn Equipment, at $48.97 per share. She expects the price of the stock to rise to $58 35 over the next 3 years. During that time she also expects to receive annual dividends of $3.51 per share. a. What is the intrinsic worth of this stock, given a required rate of return of 9%? b. What is its expected return? a. The intrinsic worth of this stock is $. (Round to the nearest cent.)
Over the next year, the stock market will either be a bull market or a bear market. The probability of a bull market is 35.00%, while the probability of a bear market is 65.00%. Shares in Meguire and Company will have a return of 17.90% in a bull market, and -17.20% in a bear market. What is the Volatility of Meguire and Company shares? 17.45% 15.97% 17.55% 16.74%
You purchase 115 shares of stock for $53 a share. The stock pays a $7 per share dividend at year- end. What is the rate of return on your investment for these end-of-year stock prices? What is your real (inflation-adjusted) rate of return? Assume an inflation rate of 5%. (Round your answers to 2 decimal places. Use the minus sign for negative numbers If it is necessary.) a. End-of-year stock price = $48 Rate of return Real rate b. End-of-year stock price = $53 Rate of return Real rate c. End-of-year stock price = $60 Rate of return Real rate
Mr. Jones has a 2-stock portfolio with a total value of $540,000. $195,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 16.60%, Stock B is 12.40%, and correlation between Stock A and Stock B is –0.40, what would be the expected risk on Mr. Jones’ portfolio (standard deviation of the portfolio return)?
LO some shares of Health Diagnostics, $75 a share. She expects the price of the stock to rise to $115 a share over the next three years. During that time, she also expects to receive annual dividends of $4 per share. Assuming that the investor's expectations (about the future price of the stock and the dividends that it pays) hold up, what rate of return can the investor expect to earn on this investment? (Hint: Use either the approximate yield formula or a financial calculator to solve this problem.) LO3,4 3. Calculating expected return on a stock. The price of Outdoor Designs, Inc. is now $85. The company pays no dividends. Fred Gray expects the price four years from now to be $125 a share. Should Fred buy Outdoor Designs if he wants a 15 percent rate of return? Explain. LO3,4 4. Calculating key stock performance metrics. The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of…
You are investing in a stock that is expected to pay a dividend per share of $3.5 in year 1, $3.7 in year 2, $3.9 in year 3, and $4.0 in year 4. The required rate of return on the stock is 9.5%. Analysts expect earnings per share (EPS) of $13 and a P/E ratio of 36 at the end of year 4. What is the intrinsic value of the stock?
Assume you purchased the right to sell 2,000 shares of Target stock in February 2022 at a strike price of $240 per share. Suppose Target stock sells for $212 per share immediately before your options’ expiration. What is the rate of return on your investment? What is your rate of return if the stock sells for $268 per share (think about it)? Assume your holding period for this investment is exactly three months. Note: A negaive value should be indicated by a minus sign. Do not round intermediate calculations. Enter your 3-month returns as a percent rounded to 2 decimal places.

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