- Consider two assets: A and B. Asset A is a stock. For the stock, there is a probability of 0.7 that next period each shareholder will receive $5 as dividends and that the stock price immediately after the dividend has been paid (the ex-dividend price) is $120. With probability 0.3 next period each shareholder will receive $2 as dividends and the ex-dividend price will be $60.
Asset B is a zero coupon bond with no default risk, that will pay its holder a payoff $50 next period (assume that the face value is $50).
- If investors are risk neutral which asset of the two will have a higher price? Which asset will have a higher expected return?
- If investors are mean-variance investors. That is, they like expected return and dislike standard deviation, can we say which asset will have a higher price? Which will have a higher expected return?