A share of stock A is selling at K23.50. A summary of the uncertainty about next year’s holding period return with three possible scenarios: Business Conditions Scenario,s Probability, p End of Year Price High Growth 1 0.35 K35 Normal Growth 2 0.30 K27 No growth 3 0.35 K15 Annual dividends are K4.40, K4 and K4 under the different business conditions High, Normal and No growth, respectively. Required: (i). Calculate the annual holding period returns for each of the three scenarios and the expected HPR and the standard deviation of the HPR. (ii). A financial analyst forecasts the return on the LuSE All share index portfolio over the coming year will be 10 %. The one year T-bill rate is 5 %recent returns of the Index suggest a standard deviation of returns to be 18 %. (iii) What does this information suggest about the degree of risk aversion of the average investor assuming the average portfolio resembles the LuSE All share index? and What is the Sharpe measure of the portfolio above?
- A share of stock A is selling at K23.50. A summary of the uncertainty about next year’s holding period return with three possible scenarios:
|
Business Conditions |
Scenario,s |
Probability, p |
End of Year Price |
|
High Growth |
1 |
0.35 |
K35 |
|
Normal Growth |
2 |
0.30 |
K27 |
|
No growth |
3 |
0.35 |
K15 |
|
|
|
|
|
|
|
|
|
|
Annual dividends are K4.40, K4 and K4 under the different business conditions High, Normal and No growth, respectively.
Required:
(i). Calculate the annual holding period returns for each of the three scenarios and the expected HPR and the standard deviation of the HPR.
(ii). A financial analyst
(iii) What does this information suggest about the degree of risk aversion of the average investor assuming the average portfolio resembles the LuSE All share index? and What is the Sharpe measure of the portfolio above?
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