Aaron owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Aaron's portfolio value consists of HDS's shares, and the balance consists of BSB's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence 0.20 0.35 0.45 Strong Normal Weak Happy Dog Soap 17.5% 10.5% -14% • The expected rate of return on Happy Dog Soap's stock over the next year is • The expected rate of return on Black Sheep Broadcasting's stock over the nex • The expected rate of return on Aaron's portfolio over the next year is Black Sheep Broadcasting Calculate expected returns for the individual stocks in Aaron's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year. The expected returns for Aaron's portfolio were calculated based on three possib time, and for each condition there will be a specific outcome. These probabilities 1.19% 1.06% 24.5% 14% -17.5% 0.75% ons in the market. Such conditions will vary from time to omes can be represented in the form of a continuous

Mr. Jones has a 2-stock portfolio with a total value of $540,000. $195,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 16.60%, Stock B is 12.40%, and correlation between Stock A and Stock B is –0.40, what would be the expected risk on Mr. Jones’ portfolio (standard deviation of the portfolio return)?

LO some shares of Health Diagnostics, $75 a share. She expects the price of the stock to rise to $115 a share over the next three years. During that time, she also expects to receive annual dividends of $4 per share. Assuming that the investor's expectations (about the future price of the stock and the dividends that it pays) hold up, what rate of return can the investor expect to earn on this investment? (Hint: Use either the approximate yield formula or a financial calculator to solve this problem.) LO3,4 3. Calculating expected return on a stock. The price of Outdoor Designs, Inc. is now $85. The company pays no dividends. Fred Gray expects the price four years from now to be $125 a share. Should Fred buy Outdoor Designs if he wants a 15 percent rate of return? Explain. LO3,4 4. Calculating key stock performance metrics. The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of…

3. Kelly has one share of a stock. She has two days to sell her stock. At the opening of the stock market on each day, she decides whether to hold or sell the stock. If she decides to sell the stock, she sells it at the opening price. On each day, the stock price is expected to increase by $20 with probability 0.4 and decrease by $16 with probability 0.6 at the closing of the market. Assume that the opening price on the first day is $100. Kelly wants to maximize her wealth. a. Construct a decision tree for Kelly's stock selling problem. b.  Find an optimal decision strategy for Kelly using the expected value approach. What is the expected value of the optimal decision strategy? Show the backward pass procedure.