Question

Toyota stock has the following probability distribution of expected prices one year from now: State Probability Price 1 25 % $ 50 2 40 % $ 60 3 35 % $ 70 If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding-period return on Toyota

Answer 1

Answer:

20%

Explanation:

the expected future value of Toyota's stock = (0.25 x $50) + (0.40 x $60) + (0.35 x $70) = $61

dividends received = $4

total returns during one year = $4 + ($61 - $55) = $11

expected holding period return = $11 / $55 = 20%

In order to determine the expected value of a future cash flow we must multiply each possible value by the probability of occurrence. In this case, the only certainty was the dividend that will be received.

Answer 2

The expected holding-period return on Toyota is 18.18%.

• The calculation is as follows:

State         Probability              Price           Probability × Price

1                      25%                      $50                 $12.50

2                     40%                      $60                $24.00

3                     35%                       $70                $24.50

Expected Price in 1 year                                   $61.00

Now  

Income from holding Toyota Stock is

= ($61.00 - $55.00) + $4.00

=  $10.00

Now finally the holding period return is  

= $10.00 ÷ $55.00

= 0.1818 or 18.18%

Therefore we can conclude that The expected holding-period return on Toyota is 18.18%.

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