The stock of Business Adventures sells for $40 a share. It is likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:
The stock of Business Adventures sells for $40 a share. It is likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:
Economy Outcome Boom Normal Growth Recession Probability 10% 30% 60% Stock Price $55 $40 $35 Dividend $2 $1 $0
Section 1:
a. Calculate the expected holding-period return and standard deviation of the holding-period return.
b. Calculate the expected return and standard deviation of a portfolio invested (60%) in Business Adventures and (40%) in Treasury bills. The return on bills is 3%.
c. What is the Sharpe ratio of the complete portfolio constructed in part b. d. What is the CAL line equation for the complete portfolio?
d. Draw the CAL line for the complete portfolio.
Section 2: Leveraged Portfolio
a. Calculate the expected return and standard deviation of a portfolio invested (160%) in Business Adventures and (-40%) in Treasury bills. The return on bills is 3%.
b. What is the Sharpe ratio of the complete portfolio constructed in part a.
c. What is the CAL line equation for the complete portfolio?
d. Draw the CAL line for the complete portfolio.
Section 3: Answer the following question
Why should investors diversify their investments rather than putting all their money in one stock, such as Amazon? Explain in complete sentences using the knowledge from this chapter.
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