A stock's price is $100 at the beginning of a year. There is a 25 percent chance that the price will be $90 at the end of the year, and a 75 percent chance that the price will be $130 at the end of the year. The stock will pay a dividend of $10 during the year.
a.Calculate the stock's expected return. b.Calculate the standard deviation of the stock's return.
What will be an ideal response?
| a. | Expected return | = [0.25 × ($90 + $10 ? $100)/$100] + [0.75 × ($130 + $10 ?$100)/$100] |
| = (0.25 × 0) + (0.75 × 0.4) = 0.3 = 30% | ||
| b. | Standard deviation | = {[0.25 × (0 ? 0.3)2] + [0.75 × (0.4 ? 0.3)2]}1/2 = 17.3% |
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