Coca Cola stock has the following probability distribution of expected prices one year from now: $\begin{array} { c c c }
\text { state } & \text { Probability } & \text { Price } \
1 & 25 \% & \$ 50 \
2 & 404 & \$ 60 \
3 & 35 \% & \$ 70
\end{array}$ 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?
A) 17.72%
B) 18.89%
C) 17.91%
D) 18.18%

Question

Coca Cola stock has the following probability distribution of expected prices one year from now: $\begin{array} { c c c } 
\text { state } & \text { Probability } & \text { Price } \
1 & 25 \% & \$ 50 \
2 & 404 & \$ 60 \
3 & 35 \% & \$ 70
\end{array}$ 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?
A) 17.72%
B) 18.89%
C) 17.91%
D) 18.18%

Quizplus · Accepted Answer

The expected holding-period return (HPR) can be calculated by finding the weighted average of the returns in each state, where the weights are the probabilities of each state. However, there's a typo in the probability for state 2 (404% is not possible), assuming it's meant to be 40%. The calculation is as follows:1. Calculate the return for each state:    - State 1: $\frac{(50 + 4) - 55}{55} = -\frac{1}{55}$ or approximately -1.82%   - State 2: $\frac{(60 + 4) - 55}{55} = \frac{9}{55}$ or approximately 16.36%   - State 3: $\frac{(70 + 4) - 55}{55} = \frac{19}{55}$ or approximately 34.55%2. Calculate the expected return using the corrected probabilities:   - $25\% \times (-1.82\%) + 40\% \times 16.36\% + 35\% \times 34.55\% = -0.455\% + 6.544\% + 12.0925\% = 18.1815\%$Therefore, the expected holding-period return on Coca Cola is approximately 18.18%.

Coca Cola Stock Has the Following Probability Distribution of Expected