#15 Scenario Analysis and Portfolio Risk The common stock of Learning Tower of Pita Inc., a restaurant chain, will generate payoffs to investor next year, which depends on the state of the economy....

#15 Scenario Analysis and Portfolio Risk

The common stock of Learning Tower of Pita Inc., a restaurant chain, will generate payoffs to investor next year, which depends on the state of the economy.

                                                Dividends                    Stock Price

Boom                                      $8                                $240

Normal economy                    $4                                $90

Recession                                $0                                0

1. The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to the Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally like, The stock today for $80.


2. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment- the owner of a gambling casino or a successful bankruptcy lawyer? Explain.