The common stock of Escapist Films sells for $40 a share and offers the followin

Question

The common stock of Escapist Films sells for $40 a share and offers the following payoffs next year: Dividend Stock Price Boom 0 $30 Normal economy $2 44 Recession 3 51 -------------------------------------------------------------------------------- All three scenarios are equally likely. a. Calculate the expected return of Escapist. (Negative values should be indicated by a minus sign.) Expected Return Boom 25% my answer is wrong Normal economy 15 % my answer is correct Recession 35% my answer is correct -------------------------------------------------------------------------------- b. Calculate the standard deviation of Escapist. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Standard deviation 8.17 % wrong answer

Explanation / Answer

tock Price this year = $40
Boom: Dividend + stock price = $0+$30 = 30
Expected return = (30-40)/50 = -20%

Normal economy: Dividend + stock price = $1+ 55 = $56
Expected return = (56-50)/50 = 12%

Recession: Dividend + stock price = 3 + 70= $73
Expected return = (73-50)/50 = 46%

Overall expected return given all 3 scenarios are equally likely:
(-20%+12%+46%)/3 = 12.67%

variance: (1/3)(-20%-12.67%)^2 + (1/3)(-12%-12.67%)^2 + (1/3)(46%-12.67%)^2 =(NNN) NNN-NNNN

Standard deviation = sqrt(726.222%) = 26.95%

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