# Portfolio Risk: Expected Rate of Return and Standard Deviation

1) Scenario Analysis. The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year:

Dividend Stock Price

Boom $5 $195

Normal economy 2 100

Recession 0 0

The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Learning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $80.

2) Question:

Portfolio Risk. Who would view the stock of Learning Tower of Pita as a risk reducing investment - the owner of a gambling casino or a successful bankruptcy lawyer? Explain.

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#### Solution Preview

The answer can be seen in the attached Excel file

Portfolio Risk

Scenario Analysis. The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year:

Dividend Stock price

Boom 5 195 150.00%

Normal economy 2 100 27.50%

Recession 0 0 -100.00%

The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Learning Tower of Pita shareholders. Assume for simplicity ...

#### Solution Summary

Calculates the expected rate of return and standard deviation of return to Learning Tower of Pita shareholders.

Market portfolios: expected return, risk free rate, standard deviation, forward contract

See the attached file.

Consider the following five problems:

a. Problem 10.31

b. Problem 10.38

c. Problem 10.6

d. Problem 25.4

e. Problem 10.32

Select any three and solve them. In addition to solving these problems, explain the financial impact of the solution or explain how a financial manager would interpret the solution. Please submit your work in Microsoft Excel, using the math and finance functions so that your calculations can be seen in the cell background. If you choose to use Microsoft Word, you must show all of your formulas or calculator keystrokes.

For the remaining two problems, answer the following questions:

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem.