Question

Ibrahim is considering investing in two shares. Their expected returns and associated probabilities are given below:

State of Economy Probability Returns Returns

A% B%

Bad 0.10 (20) 30

Normal 0.60 10 20

Good 0.30 70 50

**Required**

- Calculate the expected returns and standard deviation of A? (10marks)
- Calculate the expected returns and standard deviation of B? 10marks)
- Frafraha ltd is expected to pay an end of year dividend of GHȼ 10 a share. After the dividend payments, its share price is expected to be GHȼ 110. Investor requires a return of 10%

**Required.** How much
are you prepared to pay for a share?

Answer #1

1. Jerome is considering investing $10,000 in a security that
has the following distribution of
possible one-year returns:
Probability of
Occurrence 0.10 0.20 0.30 0.30 0.10
Possible
Return -10% 0% 10% 20% 30%
a) What is the expected return in % associated with the
investment?
b) Calculate the expected return in DOLLAR AMOUNT for the
investment.
c) What is the standard deviation associated with the
investment?

A portfolio is composed of two shares. The following parameters
associated with the returns of the two shares are given. Share 1 2
Proportion of portfolio 0.30 0.70 Mean 0.12 0.25 Standard deviation
0.02 0.15 For each of the following values of the coeffi cient of
correlation, determine the mean and the standard deviation of the
return on the portfolio. a ρ = 0.5 b ρ = 0.2 c ρ = 0.0

Syntex Ltd is considering an investment in one of two ordinary
shares. Given the information that follows, which investment is
better, based on the risk (as measured by the standard deviation)
and return?
Share A
Share B
Probability
Return
Probability
Return
0.35
13%
0.15
−4%
0.30
16%
0.35
55%
0.35
20%
0.35
13%
0.15
20%
a. Given the information in the table, the expected rate of
return for share A is
____%.
(Round to two decimal places.)The standard deviation of...

John is considering two alternative investments (A and B). The
profit possibilities and their associated probabilities of
occurrence are given in the table below.
investment a
investment b
profit = x
$20
$80
$30
$40
profitability
.70
.30
.40
.60
a. which investment should john choose to get a higher expected
profit
b. please calculate the variance and standard deviation for both
investments. Which has a lower variance

An investor is considering a portfolio mix of 70% of stock A and
30% of Stock B. Stock A’s returns are expected to be 20%, 10% and
8% in good, average and bad economies respectively. Stock B’s
returns are expected to be 25%, 2% and (15%) in good, average and
economies respectively. The probability of a good economy is
expected to be 60%, while the average and bad economies have a 20%
chance of occurrence. Given this information, calculate the...

You are considering investing $1,000 in a complete portfolio.
The complete portfolio is composed of Treasury bills that pay 2%
and a risky portfolio, P, constructed with two risky securities, X
and Y. The optimal weights of X and Y in P are 40% and 60%,
respectively. X has an expected rate of return of 0.10 and variance
of 0.0081, and Y has an expected rate of return of 0.06 and a
variance of 0.0036. The coefficient of correlation, rho,...

The table below displays returns associated with a company's
shares over the last 15 years.
Year
Return
(% pa)
2005
9
2006
-2
2007
20
2008
-4
2009
18
Year
Return
(% pa)
2010
8
2011
19
2012
1
2013
13
2014
-2
Year
Return
(% pa)
2015
35
2016
-3
2017
28
2018
18
2019
31
Based on this historic data, calculate the expected return on
the shares and its standard deviation. Give your answers as a
percentage per...

You are given the following probability distribution of returns
of two stocks A and B. If you form a portfolio by investing
$750,000 in stock A and $1,250,000 in Stock B, calculate the
expected return of your portfolio.
State of Economy
Probability of State
Return of Stock A
Return of Stock B
Recession
0.10
55%
-20%
Slow Down
0.20
40%
10%
Normal Economy
0.45
10%
15%
Boom
0.25
-20%
40%

You are considering investing $1,000 in a complete portfolio.
The complete portfolio is composed of Treasury bills that pay 2%
and a risky portfolio, P, constructed with two risky securities, X
and Y. The optimal weights of X and Y in P are 40% and 60%,
respectively. X has an expected rate of return of 0.10 and variance
of 0.0081, and Y has an expected rate of return of 0.06 and a
variance of 0.0036. The coefficient of correlation, rho,...

You estimate that AE Corp has a 20% chance of generating 30%
returns, a 20% chance of generating -40% returns, and a 60% chance
of generating 10% returns. What are the expected returns and
standard deviation of AE Corp?
Acme Inc. plans to pay a $1/share dividend on a quarterly basis.
What is the price of their shares given a 12% annually
compounded cost of capital? What if the firm plans to increase
its dividend by 5% every yea

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