BUS 106 HW 2 A ch 11 - Homework 2 CH 11 16 The common stock of Escapist Films sells for \$25 a share and offers the following payoffs next year

# BUS 106 HW 2 A ch 11 - Homework 2 CH 11 16 The common...

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Homework 2 CH. 11 16. The common stock of Escapist Films sells for \$25 a share and offers the following payoffs next year: DividendStock PriceBoom\$0 \$18Normal economy126Recession334a.Calculate the expected return and standard deviation of Escapist. All three scenarios are equally likely. b.Now calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita. (From problem 15) Show that the portfolio standard deviation is lower than that of either stock. Explain why that happens. DividendStock PriceBoom\$8\$240Normal economy490RecessionRR Boom = (8 + 240 – 80)/80*100= 210%RR Norm. Eco. = (4 + 90 – 80)/80* 100 = 17.5%RR Recession = (0 + 0 – 80)/80*100 = -100%Rate of return with 50% investment on each scenarioRR Boom = 50% x (-28%) + 50% x (210%) = 91%RR Norm. Eco. = 50% x (8%) + 50% x (17.5%) = 12.75%RR Recession = 50% x (48%) + 50 % x (-100%) = - 26%
Portfolio expected return = (91 + 12.75- 26)/3 = 25.92%Variance = 1/3*(91 - 25.92)^2 + 1/3*(12.75 - 25.92)^2 + 1/3*(-26 - 25.92)^2 =2368.18STD DEV = (2368.18)^(1/2) = 48.66%
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