Question

1A) What is the one-year holding period return for a stock that was purchased for $22.40 at the beginning of the year, paid out $1.75 in dividends, and was sold for $28.25?

	a.	20.7%
	b.	26.1%
	c.	26.9%
	d.	33.9%

1B) Suppose investors in Acme Co., Inc. expect to earn a return of 4% (with a 20% probability), a return of 10% (with a 60% probability) and a 20% return (with a probability of 20%). What is the expected return for Acme’s stock?

	a.	11.3%
	b.	10.8%
	c.	34.0%
	d.	11.2%

1C) What is the standard deviation of Acme Co., Inc given the expectations of a 4% return 20% of the time, a 10% return 60% of the time, and a 20% return 20% of the time?

	a.	0.27%
	b.	5.15%
	c.	23.77%
	d.	9.75%

1D)

Scenario Probabilities	Scenario Returns - Security A	Scenario Returns - Security B	Scenario Returns- Security C
.35	15%	25%	-6%
.25	10%	12%	0
.25	7%	7%	-3%
.15	5%	1%	4

What are the expected returns for each of the three stocks (A, B, and C)?

	a.	11.75%, 11.75%, 3.50%
	b.	10.25%, 13.65%, -2.25%
	c.	14.00%, 14.30%, -1.15%
	d.	2.00%, 1.67%, 2.17%

Answer 1

Answer 1A:

Holding Period Return = (Selling Price + Dividend - Purchase Price) / Purchase Price
Holding Period Return = ($28.25 + $1.75 - $22.40) / $22.40
Holding Period Return = 33.9%

Answer 1B:

Expected Return = 4% * 20% + 10% * 60% + 20% * 20%
Expected Return = 10.8%

Answer 1C:

Expected Return = 4% * 20% + 10% * 60% + 20% * 20%
Expected Return = 10.8%

Variance = 0.20 * (0.04 - 0.108)^2 + 0.60 * (0.10 - 0.108)^2 + 0.20 * (0.20 - 0.108)^2
Variance = 0.002656

Standard Deviation = (0.002656)^(1/2)
Standard Deviation = 5.15%

Answer 1D:

Security A:

Expected Return = 0.35 * 15% + 0.25 * 10% + 0.25 * 7% + 0.15 * 5%
Expected Return = 10.25%

Security B:

Expected Return = 0.35 * 25% + 0.25 * 12% + 0.25 * 7% + 0.15 * 1%
Expected Return = 13.65%

Security C:

Expected Return = 0.35 * (-6%) + 0.25 * 0% + 0.25 * (-3%) + 0.15 * 4%
Expected Return = -2.25%

answered by: anonymous