Question

Find the standard deviation of returns on an asset that gives returns of 20%, 5%, and -15% with the probabilities of 20%, 50%, and 30% if its mean return is 2%?

• 3.69%
• 14.40%
• 12.49%
• 14.34%
• 156.00%

Sally's preferred stock pays an annual dividend of $3.50. If the return required by shareholders is 9% and she expects earnings growth of 4%, what is the price per share for this preferred? .

• $50.00
• $38.89
• $87.50
• $31.82

Today, securities trade to yield 2.5%. Current market offers a premium over the risk-free rate of 6%. If the beta of a stock is 0.93, find the required rate of return of the stock

• 8.08%
• 5.76%
• 9.26%
• 8.33%

Answer 1

>>>>>

Variance of returns = Σ (Return - Mean return)^2 * Probability

= [(20%-2%)^2 * 20%] + [(5%-2%)^2 * 50%] + [(-15%-2%)^2 * 30%]

= 0.00648 + 0.00045 + 0.00867

= 0.0156

Standard deviation of returns = Squareroot of variance

= (0.0156)^(1/2)

= 0.1249

= 12.49%

Therefore, standard deviation of returns is 12.49%

>>>>

Annual dividend = D0 = $3.50

Required return = ke = 9%

Price of Preferred stock = D0 / ke

= $3.50 / 0.09

= $38.888889

Therefore, price of preferred stock is $38.89

>>>>

rf = yeild of security = 2.5%

rm - rf = premium over risk free rate = 6%

beta = 0.93

Required return of the stock = rf + beta * (rm-rf)

= 2.5% + (0.93 * 6%)

= 2.5% + 5.58%

= 8.08%

The required return of the stock is 8.08%