Toyota stock has the following probability distribution of expected prices one year from now: $$\begin{array} { r c l }
\text { State } & \text { Probability } & \text { Price } \
1 & 25 \% & \$ 50 \
2 & 40 \% & \$ 60 \
3 & 35 \% & \$ 70 \
\hline
\end{array}$$ 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?
A) 17.72%
B) 18.89%
C) 17.91%
D) 18.18%

Question

Toyota stock has the following probability distribution of expected prices one year from now: $$\begin{array} { r c l } 
\text { State } & \text { Probability } & \text { Price } \
1 & 25 \% & \$ 50 \
2 & 40 \% & \$ 60 \
3 & 35 \% & \$ 70 \
\hline
\end{array}$$ 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?
A) 17.72%
B) 18.89%
C) 17.91%
D) 18.18%

Quizplus · Accepted Answer

The expected price is calculated as: (0.25 * 50) + (0.40 * 60) + (0.35 * 70) = 61. The expected holding-period return is: [(61 + 4 - 55) / 55] * 100% = 18.18%.

Toyota Stock Has the Following Probability Distribution of Expected Prices