MBA 616- Spring 2012
Recommended Homework Questions-Chapter 6 and Stat Review Material following 01/06/2012 class:
End-of-Chapter Problems from Chapter 6 on pages 170-172 of the text: #6-33, 6-35, 6-36, 6-37, and 6-45
Other Questions:
1. Consider a stock with a current price of $50, where the price in 1 year is expected to be either $80 with a 10% chance, $66 with a 20% chance, $58 with a 20% chance, $50 with a 20% chance, $40 with a 20% chance, or $32 with a 10% chance. What is the expected return and standard deviation for the one-year stock return, based on this given distribution with 6 possible state outcomes? If a one-year Treasury bill has a yield of 2%, what is the risk premium for this stock?

2. Assume that the below numbers are the percentage rates of return for the annual return of a given stock for a 30 year period. What is your estimate of the annualized expected return and standard deviation for this stock, based on these observed historical returns? Year | Observed Stock Return | 1 | 39.33% | 2 | 28.44% | 3 | 13.86% | 4 | 0.15% | 5 | -3.68% | 6 | 8.02% | 7 | -21.66% | 8 | 37.36% | 9 | -14.92% | 10 | -62.47% | 11 | 18.25% | 12 | -8.57% | 13 | -7.50% | 14 | -2.53% | 15 | 32.46% | 16 | -21.37% | 17 | 14.61% | 18 | 18.80% | 19 | 4.96% | 20 | -25.62% | 21 | -0.70% | 22 | 57.04% | 23 | -2.82% | 24 | 9.80% | 25 | -14.70% | 26 | -7.59% | 27 | 39.73% | 28 | 9.66% | 29 | -9.98% | 30 | 30.37% |
3. Consider an investment project that will return $50,000 to investors for 90% of the time in the good outcome, but will only return $25,000 for 10% of the time in the bad outcome. These cash flows will take place two years from today. Again, assume a risk-neutral world (as in Chapter 6) and the expected return for two-year investments is 8% per annum (use annual compounding to estimate