There are three stocks, A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of naturefor economic growth in the upcoming year (each equally likely to occur); economic growth may be strong, moderate, or weak. Thereturns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:StockABсStrong Growth39%30%6%State of NatureModerate Growth17%5%14%Weak Growth-5%0%22%If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short position inin an equally weighted portfolio ofO a. C, A and B O b. B, A and C OCA and B, C O d. A, B and Cand a long positionF

Expected return from stock A =39+17-5/3=17%Expected return from stock B =30+5+0/3=11.67%Expected…

Answered: There are three stocks, A, B, and C.…

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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You wish to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rates of dividends for stocks A and B are 4% and 3%, respectively. Using the constant growth DDM, the intrinsic value of stock A Will be less than the intrinsic value of stock B O Will be higher than the intrinsic value of stock B O More information is necessary to Answer this question O Will be the same as the intrinsic value of stock B
You are considering purchasing a share of preferred stock with the following characteristics: par value = $100 dividend rate = 12% per year payment schedule = quarterly maturity date = required rate of return = 6% per year current market price = $135 per share Based on this information, answer the following: A. What is the dollar amount of the quarterly dividend on this stock? B. Using the Discounted Cash Flow Method, what is the dollar value of this stock? C. Using the Discounted Cash Flow Method, what is the annual expected return for this stock? D. Based on your answer to part B, should you invest in the stock? Why or why not? E.…
If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company. Year 1 $ 62.18 40.30 2.35 a. High target price b. Low target price Year 2 $67.29 43.18 2.58 Year 3- $74.18 39.27 2.73 Year 4 $78.27 46.21 High price Low price EPS Earnings are expected to grow at 9 percent over the next year. 6. What is the high target stock price in one year? 32.16. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. b. What is the low target stock price in one year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. 2.890
The table given below reports last five years data on annual rates of return (HPYS) on two stocks Year Stock A (%) Stock B (%) 1 16 -10 24 40 30 10 5 -20 20 1. Compute the arithmetic mean of the annual rates of return for both stocks. Which stock is preferable using this measure
A stock had returns of 8%, 14%, and 2% for the past three years. Based on these returns, what is the probability that this stock will earn at least 20% in any one given year? A) 0.5% B) 1.0% C) 2.3% D) 5.0% E) 16.0% Answer: C) 2.3% Please show the steps.
Jill believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? Economic Conditions Strong Normal Weak 19.55% 18.98% 19.37% 18.62% Probability 30% 40% 30% Return 34.0% 10.0% -15.0%
Suppose you invest 70% of your fund in stock A and the other 30% in stock B. If stock A and B are expected to have the following returns next year, then what are the standard deviations for Stock A, Stock B and the portfolio returns respectively? Probability State of Economy Recession Boom 9.60%; 11.6% 12.60%; 14.2% 2.60%; 14.05% 9.60%; 7.80% .2 .8 Stock A -9% 18% Stock B 1% 3%
Note: Please answer this question only by typing your answers in the typing space available for this question Assume that the annual rates of return for two stocks (Reliance and Wipro) for the past 5 years are as given below: Year 2 3 4 5 Reliance 35% 11% -7% -12% 24% Wipro 28% 7% -11% 15% -5% Based on the above information answer the following questions: (a) Compute the arithmetic mean of the annual rate of return for each stock. Which stock is preferable by this measure? (b) Compute the geometric mean of the annual rate of return for each stock. Which stock is preferable by this measure? (c) Compute the standard deviation of the annual rate of return for each stock. Which stock is preferable by this measure?
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(Common stock valuation) The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an annual rate of 8.00 percent for an indefinite number of years. a. If your required rate of return is 10.50 percent, what is the value of the stock for you? b. Should you make the investment? a. If your required rate of return is 10.50 percent, the value of the stock for you is $ nearest cent.) (Round to the
During the last four years, you owned two stocks that have had the following annual rates of return. Year KEX KW 2014 0.13 -0.08 2015 0.05 0.21 2016 0.07 0.06 2017 0.09 0.15 Compute the arithmetic mean annual return for EACH stock Compute the standard deviation of the annual rate of return for EACH stock Taking the results of (i) and (ii) into consideration, which stock is preferable? Why? Compute the geometric mean annual return for EACH stock
10.4 Obtain at least 5 years’ worth of daily or weekly stock price data for a stock of your choice. a. Compute annual volatility using all the data. b.Compute annual volatility for each calendar year in your data. How does volatility vary over time? c.Compute annual volatility for the first and second half of each year in your data. How much variation is there in your estimate? how do I do these in excel?

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