Calculate the expected holding-period return and standard deviation

The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:

 

	Dividend	Stock price
Boom	$2.00	$54
Normal economy	1.20	48
Recession	.95	39

 

a.	Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Expected return	%
Standard deviation	%

 

b.	Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Expected return	%
Standard deviation

Solution: