Ima’s sister, Uma, has completed her own analysis of the economy and Wallnut’s stocks. Uma used recession, constant growth and inflation scenarios but with different probabilities and expected stock returns. Uma believes the probability of recession is quite high, at 60 percent and that in a recession Wallnut’s stock return will -20 percent. Uma believes the scenarios of constant growth and inflation are equally likely and that Wallnut’s returns will be 15 percent in the constant growth scenario and 10 percent under the inflation scenario.
a) What is Uma’s expected return forecast for Wallnut stock?
b) What is the standard deviation of the forecast?
c) If Wallnut’s current price is $20 a share and is expected to pay a dividend of $0.80 a share next year, what price does Uma expect Wallnut to sell for in one year?