You now face the choice of investing it in a U.S. Treasury bond that will return $633,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,380,000 at the end of the year. The expected rate of return on the T-bond investment is 5.5%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.
You now face the choice of investing it in a U.S. Treasury bond that will return $633,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,380,000 at the end of the year. The expected rate of return on the T-bond investment is 5.5%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.
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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You now face the choice of investing it in a U.S. Treasury bond that will return $633,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,380,000 at the end of the year.
The expected
Expert Solution
Step 1
Calculate the value of investment by dividing the value of Treasury bond at the end of the year which is $633,000 by one plus the rate of return of T-bond investment (R T-Bill) which is 5.5%.
Thus, the value of investment is $600,000.
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