What is the expected return and standard devia- tion of the return for the next year on a stock that is selling for $30 now and has probabil- ities of 0.2, 0.6, and 0.2 of selling one year from now at $24, $33, and $39, respectively?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
(Expected return and standard deviation) What is the expected return and standard devia- tion of the return for the next year on a stock that is selling for $30 now and has probabil- ities of 0.2, 0.6, and 0.2 of selling one year from now at $24, $33, and $39, respectively? Assume that no dividends will be paid on the stock during the next year and ignore taxes?
EXPECTED RETURN
The expected return of an investment is the expected value of probable return investment can generate. It is calculated by multiplying each expected future return with the probability of occurring such return.
Expected return =
where,
R = Expected return
P = probability of return
n = number of years
STANDARD DEVIATION
Standard deviation is the measure of volatility in expected future stock prices. It is a smile mathematical tool to measure the difference of returns with respect to mean.
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