You purchased stock in Cough For Dollars (CFD), a disposable mask producer. You will hold this investment for one year. At the end of this period, there are three possible outcomes: i. Recession, the probability of which is 20%. CFD stock return will be -30% in this scenario. ii. Stagnation, the probability of which is 50%. CFD stock return will be 5% in this scenario. ii. Expansion, the probability of which is 30%. CFD stock return will be 20% in this scenario. a. Compute your expected return from holding stock in CFD. b. Compute the standard deviation of this return
You purchased stock in Cough For Dollars (CFD), a disposable mask producer. You will hold this investment for one year. At the end of this period, there are three possible outcomes: i. Recession, the probability of which is 20%. CFD stock return will be -30% in this scenario. ii. Stagnation, the probability of which is 50%. CFD stock return will be 5% in this scenario. ii. Expansion, the probability of which is 30%. CFD stock return will be 20% in this scenario. a. Compute your expected return from holding stock in CFD. b. Compute the standard deviation of this return
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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Question
Transcribed Image Text:### Investment in "Cough For Dollars" (CFD)
You invested in the company Cough For Dollars (CFD), which specializes in the production of disposable masks. This investment will be held for one year. At the end of this period, the potential outcomes and their associated probabilities are:
1. **Recession**
- Probability: 20%
- CFD stock return: -30%
2. **Stagnation**
- Probability: 50%
- CFD stock return: 5%
3. **Expansion**
- Probability: 30%
- CFD stock return: 20%
### Analysis Tasks
a. **Compute the Expected Return from Holding Stock in CFD**
- This requires calculating the weighted average of all possible returns, considering their probabilities.
b. **Compute the Standard Deviation of this Return**
- This involves determining the variation or spread of the possible returns, providing insight into the investment's risk level.
**Note:** The scenarios presented help investors understand the range of potential financial outcomes depending on economic conditions over the next year.
Expert Solution
Step 1
Expected return = 0.2*-30% + 0.5*5% + 0.3*20% = 2.50%
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