Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation (or risk) of this asset? Explain.
Answer to relevant QuestionsWhy is expected return considered “forward-looking”? What are the challenges for practitioners to utilize expected return? Why do most investment scams conducted over the Internet and e-mail involve penny stocks instead of S&P 500 Index stocks? Compute the expected return and standard deviation given these four economic states, their likelihoods, and the potentialreturns:Paccar’s current stock price is $48.20 and it is likely to pay a $0.80 dividend next year. Since analysts estimate Paccar will have an 8.8 percent growth rate, what is its required return? Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within three years. If the ...
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