Calculate the E(rX), E(rY), X, and Y respectively. Consider the following two stocks. Assume that the risk-free

Calculate the E(rX), E(rY), σX, and σY respectively.

 

 

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Consider the following two stocks. Assume that the risk-free rate is 2% and agents' utility functions are U = E(rp) - 0.5Ao. Stock X currently trades at $80 and has the following price and dividend distribution based on the state of the economy: State of the Economy 1 2 3 4 5 Probability 0.1 0.2 0.35 0.25 0.1 State of the Economy 1 2 3 4 5 Year-End Price $175 $140 $90 $60 $35 Stock Y currently trades at $65 and has the following price and dividend distribution based on the state of the economy. Probability Year-End Price 0.1 0.2 0.35 0.25 0.1 Dividends $5 $4 $3.5 $1 $0 $105 $88 $65 $55 $50 Dividends $0 $0 $0 $0 $0 Consider the following two stocks. Assume that the risk-free rate is 2% and agents' utility functions are U = E(rp) - 0.5Ao. Stock X currently trades at $80 and has the following price and dividend distribution based on the state of the economy: State of the Economy 1 2 3 4 5 Probability 0.1 0.2 0.35 0.25 0.1 State of the Economy 1 2 3 4 5 Year-End Price $175 $140 $90 $60 $35 Stock Y currently trades at $65 and has the following price and dividend distribution based on the state of the economy. Probability Year-End Price 0.1 0.2 0.35 0.25 0.1 Dividends $5 $4 $3.5 $1 $0 $105 $88 $65 $55 $50 Dividends $0 $0 $0 $0 $0

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To calculate the expected return Er we will find the weighted average of the possible returns by multiplying each possible return by its probability of occurring and then summing these values The stan... View the full answer