Question

Peter owns investment alpha and 1 share of stock bravo. The total value of his holdings is $300. Stock Bravo is expected to be priced at $40 in 4 years, is expected to pay dividends of $3 in 1 year and $4 in 3 years, and has an annual expected return of 12 percent. Investment Alpha has an expected return of X and is expected to pay $31 per year for a finite number of years such that its first annual payment is expected in 1 year from today and its last annual payment is expected in 10 years from today. What is X, the expected return for investment Alpha?

Answer 1

Hence, Expected return on investment Alpha is 2.66%