Scenario Analysis and Portfolio Risk The common stock of Learning Tower of Pita Inc., a restaurant chain, will generate payoffs to investor next year, which depends on the state of the economy. Dividends Stock Price Boom $8 $240 Normal economy $4 $90 Recession $0 0 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to the Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally like, The stock today for $80. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment- the owner of a gambling casino or a successful bankruptcy lawyer? Explain.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
#15 Scenario Analysis and Portfolio Risk
The common stock of Learning Tower of Pita Inc., a restaurant chain, will generate payoffs to investor next year, which depends on the state of the economy.
Dividends Stock Price
Boom $8 $240
Normal economy $4 $90
Recession $0 0
- The company goes out of business if a recession hits. Calculate the expected
rate of return and standard deviation of return to the Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally like, The stock today for $80. - Who would view the stock of Leaning Tower of Pita as a risk-reducing investment- the owner of a gambling casino or a successful bankruptcy lawyer? Explain.
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