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What is the nominal annual rate of return

Question 1: Here are the expected returns on two stocks:

Returns

Probability X Y

0.1 -20% 10%

0.8 20 15

0.1 40 20

If you form a 50-50 portfolio of the two stocks, what is the portfolio's standard deviation?

a. 16.5%

b. 10.5%

c. 13.4%

d. 8.1%

e. 20.0%

Question 2: A share of preferred stock pays a quarterly dividend of $1.00. If the price of the stock is $50, what is the nominal (not effective) annual rate of return?

a. 8.0%

b. 8.5%

c. 10.0%

d. 9.0%

e. 9.5%

Now Priced at $20 (50% Discount)

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## Q : Determining the percentage gain

If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?