E120 Principles of Engineering Economics
Fall 2010
Problem Set #7
1.
Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share
during the year, and had an ending share price of $102. Compute the percentage total
return.
2.
You own a portfolio that is 60 percent invested in Stock X, 25 percent in Stock Y, and 15
percent in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent,
and 13 percent, respectively. What is the expected return on the portfolio?
3.
Based on the following information, calculate the expected return:
State of
Economy
Probability of
State of
Economy
Portfolio
Return if State
Occurs
Recession
.20
-.05
Normal
.50
.12
Boom
.30
.25
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4.
Consider the following information:
State of
Economy
Probability of
State of
Economy
Rate of Return if State Occurs
Stock A
Stock B
Stock C
Boom
.15
.30
.45
.33
Good
.45
.12
.10
.15
Poor
.35
.01
-.15
-.05
Bust
.05
-.06
-.30
-.09
a. Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the
expected return of the portfolio?

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- Fall '08
- ILAN
- Variance, 9%, 3%, 7%, 8%, 2%
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