Question

Consider the following probability distribution of returns for Alpha Corporation:________. Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The standard deviation of the return on Alpha Corporation is closest to:_______. a. 22.4% b. 19.0% c. 21.8% d. 19.4%

Answer 1

Answer:

c. 21.8%

Explanation:

Note: B = Year beginning stock, C = Year end stock price, D = Dividend, E = Holding Period return, F= Holding Period return*Probability, G = (Holding Period return - Expected return)^2, H= Probability * (Holding Period return - Expected return)^2

Probability     B       C       D       E        F           G              H

25%               $25  $35     -       40%   10%    0.12250    0.03063

50%               $25  $25     -       0%      0%    0.00250   0.00125

25%               $25  $20     -      -20%   -5%    0.06250   0.01563

                              Expected return = 5%                       4.75%

Holding period return = (Price at year end +dividend -Price at year beginning)/Price at year beginning

Variance = 4.75%

Standard deviation = √(variance)

Standard deviation = √4.75%

Standard deviation = 21.8%