ABC corporation has a current stock price of $50. Over the next year its price will...
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ABC corporation has a current stock price of $50. Over the next year its price will rise 10% with probability 0.6 (State 1), and it will fall 5% with probability 0.4 (State 2). In addition, it will pay a dividend of D = $3 at the end of the next year. Hint: Express holding period returns for State 1 and State 2, respectively. Say R₁ = HPR(State₁) P₁(State) + D - Po Po R₂ HPR(State2) = P₁(State2) + D - Po Po = = And, weight with the relevant probability. a) [20 pt*] Compute the mean and variance of the holding period return on ABC over the next year. b) [10 pt*] If Mike invests his wealth $10,000 in the stock of ABC, compute Mike's expected wealth at the end of one year. c) [10 pt] Jane, who is a good friend of Mike, asks Mike to lend her $10,000, and in return, she pays back $10,500 a year later. As a collateral, Jane gives Mike her car which is roughly worth $15,000. Mike decided to give Jane money instead of investing in the ABC stock. Explain Mike's behavior. ABC corporation has a current stock price of $50. Over the next year its price will rise 10% with probability 0.6 (State 1), and it will fall 5% with probability 0.4 (State 2). In addition, it will pay a dividend of D = $3 at the end of the next year. Hint: Express holding period returns for State 1 and State 2, respectively. Say R₁ = HPR(State₁) P₁(State) + D - Po Po R₂ HPR(State2) = P₁(State2) + D - Po Po = = And, weight with the relevant probability. a) [20 pt*] Compute the mean and variance of the holding period return on ABC over the next year. b) [10 pt*] If Mike invests his wealth $10,000 in the stock of ABC, compute Mike's expected wealth at the end of one year. c) [10 pt] Jane, who is a good friend of Mike, asks Mike to lend her $10,000, and in return, she pays back $10,500 a year later. As a collateral, Jane gives Mike her car which is roughly worth $15,000. Mike decided to give Jane money instead of investing in the ABC stock. Explain Mike's behavior.
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Answer rating: 100% (QA)
a Mean and Variance of the Holding Period Return To compute the mean and variance of the holding period return on ABC over the next year well use the ... View the full answer
Related Book For
Essentials Of Business Statistics
ISBN: 9780078020537
5th Edition
Authors: Bruce Bowerman, Richard Connell, Emily Murphree, Burdeane Or
Posted Date:
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