Return on Stock Investments
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One year ago, Mr. Seth Cohen invested $10,400 in 200 shares of First Industries, Inc., stock and just received a dividend of $600. Today, he sold the 200 shares at $54.25 per share. He is asking for your help to figure out:
a. His capital gain;
b. His total dollar return;
c. His percentage return; and
d. The stock's dividend yield.
Mr. Henry can invest in Hihgbull stock and Slowbear stock. His projection of the returns on these two stocks is as follows:
State of Economy Probability of State Occurring Return on Highbull Stock Return on Slowbear Stock
Recession 0.25 -2.0 5.0
Normal 0.60 9.2 6.2
Boom 0.15 15.4 7.4
1. Calculate the expected return on each stock.
2. Calculate the standard deviation of returns on each stock.
3. Calculate the covariance and correlation between the returns on the two stocks.
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Solution Summary
One year ago, Mr. Seth Cohen invested $10,400 in 200 shares of First Industries, Inc., stock and just received a dividend of $600. Today, he sold the 200 shares at $54.25 per share. He is asking for your help to figure out:
a. His capital gain;
b. His total dollar return;
c. His percentage return; and
d. The stock's dividend yield.
Mr. Henry can invest in Hihgbull stock and Slowbear stock. His projection of the returns on these two stocks is as follows:
State of Economy Probability of State Occurring Return on Highbull Stock Return on Slowbear Stock
Recession 0.25 -2.0 5.0
Normal 0.60 9.2 6.2
Boom 0.15 15.4 7.4
1. Calculate the expected return on each stock.
2. Calculate the standard deviation of returns on each stock.
3. Calculate the covariance and correlation between the returns on the two stocks.
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a. The capital gain is the appreciation of the stock price. Find the amount that Seth paid for the stock one year ago by dividing his total investment by the number of shares he purchased ($52.00 = $10,400 / 200). Because the price of the stock increased from $52.00 per share to $54.25 per share, he earned a capital gain of $2.25 per share (=$54.25 - $52.00).
Capital Gain = (Pt+1 - Pt) (Number of Shares)
= ($54.25 - $52.00) (200)
= $450
Seth's capital gain is $450.
b.The total dollar return is equal to the dividend income plus the capital gain. He received $600 in dividend income, as stated in the problem, and received $450 in capital gains, as found ...
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