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    Portfolio Risk: Expected Rate of Return and Standard Deviation

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    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.

    $2.49

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