Question

Coca Cola 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 Coca Cola today for $55 and it will pay a dividend during the year of $4 per share, what is your expected holding-period return on Coca Cola

Answer 1

Answer:

18.18%

Explanation:

Calculation for the expected holding-period return on Coca Cola

First step is to calculate the Expected Price in one year

Expected Price in one year = 50*25% + 60*40% + 70*35%

Expected Price in one year =12.5+24+24.5

Expected Price in one year = $61

Last step is to get Calculate the Holding period return using this formula

Holding period return = (Price after 1 year + Dividend - Price amount paid)/Price amount paid

Let plug in the formula

Holding period return= (61+4-55)/55

Holding period return=10/55

Holding period return=0.1818*100

Holding period return= 18.18%

Therefore the expected holding-period return on Coca Cola will be 18.18%