Reference no: EM133122575
Assume you have $1 million Cash and are trying to choose among three securities to invest.
a. Security A is a price weighted index of the following three stocks with the corresponding price information in period 0 and period 1 (assume the initial index divisor is 3):
|
Stock
|
Initial date (t=0)
|
Final Date (t=1)
|
|
|
Price
|
Shares Outstanding
|
Expected Price
|
|
A1
|
$20
|
100
|
$25
|
|
A2
|
$30
|
500
|
$30
|
|
A3
|
$40
|
600
|
$44
|
b. Security B is a value weighted index of the following three stocks with the corresponding price information in period 0 and period 1 ((assume the initial index divisor is 100):
|
Stock
|
Initial date (t=0)
|
Final Date (t=1)
|
|
|
Price
|
Shares Outstanding
|
Expected Price
|
|
B1
|
$50
|
800
|
$100
|
|
B2
|
$60
|
500
|
$80
|
|
B3
|
$70
|
600
|
$60
|
c. Security C is a single security with the following expectations:
|
State of the Market
|
Probability
|
Final Date (t=1)
Ending Price
|
Holding Period Return (Including dividends; From t=0 to t=1)
|
|
Boom
|
0.4
|
$200
|
25%
|
|
Normal
|
0.4
|
$180
|
10%
|
|
Recession
|
0.2
|
$150
|
-15%
|
Given the above choices, calculate and answer:
i). What is the single period expected return for Security A & Security B, respectively?
ii). What is the single period expected return for Security A if stocks A1 and A2 were to split 2 for 1 and 4 for 1, respectively, after period 0?
iii). What is the mean and standard deviation of the holding period return for Security C?
iv). With your $1 million cash, if you decided to invest $300,000 in Security A, $400,000 in Security B, and the remaining amount in Security C, what is your single period expected return for your portfolio, without considering the stock splits in question ii)?