Assume we have two risky shares of stock Riskforu and Riskforutoo. Information on these shares is given below. Riskforu The information we have on Riskforu is as follows. Risky stock Riskforu has a current price at time t of $100. There are three possible states of the world that occur at t + 1. In state 1, a bad state, the price of Riskforu is $90. In state 2, a normal state, the price of Riskforu is $105. In state 3, a good state, the price of Riskforu is $135. Riskforutoo The information we have on Riskforutoo follows. Risky stock Riskforutoo; also has a current price, of $100. There are also three possible states of the world which occur at t + 1. In state 1, the price of Riskforutoo is $95. In state 2 the price is $100 (this is correct there is no typo—it is meant to be $100). In state 3, the price is $140. The probabilities of each state of the world occurring are the same for both stocks. These probabilities are 0.5 for state 1, 0.25 for state 2 and 0.25 for state 3. Assume financial markets are perfectly competitive and efficient. Using scenario analysis, please complete the following tasks (1–4) and then provide an answer to the question 5 below: Put the above information into a table and/or picture to enable you to visualise it more clearly. Calculate the expected future value for stock, Riskforu and Riskforutoo. Calculate the expected rate of return for stock, Riskforu, and Riskforutoo. Calculate the variance and the standard deviation for the expected return on stock, Riskforu and Riskforutoo. What observations can you make about the relationship between risk and expected return?
Assume we have two risky shares of stock Riskforu and Riskforutoo. Information on these shares is given below. Riskforu The information we have on Riskforu is as follows. Risky stock Riskforu has a current price at time t of $100. There are three possible states of the world that occur at t + 1. In state 1, a bad state, the price of Riskforu is $90. In state 2, a normal state, the price of Riskforu is $105. In state 3, a good state, the price of Riskforu is $135. Riskforutoo The information we have on Riskforutoo follows. Risky stock Riskforutoo; also has a current price, of $100. There are also three possible states of the world which occur at t + 1. In state 1, the price of Riskforutoo is $95. In state 2 the price is $100 (this is correct there is no typo—it is meant to be $100). In state 3, the price is $140. The probabilities of each state of the world occurring are the same for both stocks. These probabilities are 0.5 for state 1, 0.25 for state 2 and 0.25 for state 3. Assume financial markets are perfectly competitive and efficient. Using scenario analysis, please complete the following tasks (1–4) and then provide an answer to the question 5 below: Put the above information into a table and/or picture to enable you to visualise it more clearly. Calculate the expected future value for stock, Riskforu and Riskforutoo. Calculate the expected rate of return for stock, Riskforu, and Riskforutoo. Calculate the variance and the standard deviation for the expected return on stock, Riskforu and Riskforutoo. What observations can you make about the relationship between risk and expected return?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Assume we have two risky shares of stock Riskforu and Riskforutoo. Information on these shares is given below.
Riskforu
The information we have on Riskforu is as follows. Risky stock Riskforu has a current price at time t of $100. There are three possible states of the world that occur at t + 1.
- In state 1, a bad state, the price of Riskforu is $90.
- In state 2, a normal state, the price of Riskforu is $105.
- In state 3, a good state, the price of Riskforu is $135.
Riskforutoo
The information we have on Riskforutoo follows. Risky stock Riskforutoo; also has a current price, of $100. There are also three possible states of the world which occur at t + 1.
- In state 1, the price of Riskforutoo is $95.
- In state 2 the price is $100 (this is correct there is no typo—it is meant to be $100).
- In state 3, the price is $140.
The probabilities of each state of the world occurring are the same for both stocks. These probabilities are 0.5 for state 1, 0.25 for state 2 and 0.25 for state 3. Assume financial markets are
Using scenario analysis, please complete the following tasks (1–4) and then provide an answer to the question 5 below:
- Put the above information into a table and/or picture to enable you to visualise it more clearly.
- Calculate the expected
future value for stock, Riskforu and Riskforutoo. - Calculate the expected
rate of return for stock, Riskforu, and Riskforutoo. - Calculate the variance and the standard deviation for the expected return on stock, Riskforu and Riskforutoo.
- What observations can you make about the relationship between risk and expected return?
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