expected to result during each state of nature by its probability of occurrence. Consider the following case: Aaron owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Energy (HWE). Three-quarters of Aaron's portfolio value consists of BLM's shares, and the balance consists of HWE'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 Strong Normal Weak Probability of Occurrence 20% 35% Blue Liama Mining Hungry Whale Energy 10% 14% 6% 8% -8% -10% Calculate expected returns for the individual stocks in Aaron'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 Blue Llama Mining's stock over the next year is The expected rate of return on Hungry Whale Energy's stock over the next year is The expected rate of return on Aaron's portfollo over the next year is The expected returns for Aaron's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph. For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph
expected to result during each state of nature by its probability of occurrence. Consider the following case: Aaron owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Energy (HWE). Three-quarters of Aaron's portfolio value consists of BLM's shares, and the balance consists of HWE'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 Strong Normal Weak Probability of Occurrence 20% 35% Blue Liama Mining Hungry Whale Energy 10% 14% 6% 8% -8% -10% Calculate expected returns for the individual stocks in Aaron'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 Blue Llama Mining's stock over the next year is The expected rate of return on Hungry Whale Energy's stock over the next year is The expected rate of return on Aaron's portfollo over the next year is The expected returns for Aaron's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph. For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph
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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Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Transcribed Image Text:Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible
circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return
expected to result during each state of nature by its probability of occurrence.
Consider the following case:
Aaron owns a two-stock portfolio that invests in Blue Liama Mining Company (BLM) and Hungry Whale Energy (HWE). Three-quarters of Aaron's
portfolio value consists of BLM's shares, and the balance consists of HWE'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
20%
35%
45%
Strong
Normal
Weak
Blue Llama Mining Hungry Whale Energy,
10%
14%
6%
-8%
8%
-10%
Calculate expected returns for the individual stocks in Aaron's portfollo 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 Blue Llama Mining's stock over the next year is
The expected rate of return on Hungry Whale Energy's stock over the next year is
The expected rate of return on Aaron's portfolio over the next year is
The expected returns for Aaron's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to
time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous
probability distribution graph.
For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph:
Transcribed Image Text: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
Company G
Company H
16
D
20
40
RATE OF RETURN (Percent)
-20
60
Based on the graph's information, which company's returns exhibit the greater risk?
O Company H
O Company G
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