Problem:
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 $50
Normal economy 1.00 43
Recession .50 34
a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely.
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%.