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1. Expected Return, Variance and Standard Deviation Consider the following information on returns and probabilities: State Probability X Y Boom .25 15% 10% Normal
1. Expected Return, Variance and Standard Deviation Consider the following information on returns and probabilities: State Probability X Y Boom .25 15% 10% Normal .60 10% 9% Recession .15 5% 10% What are the expected return and standard deviation for Stock X and Stock Y? What are the expected return and standard deviation for a portfolio with an investment of $6,000 in asset X and $4,000 in asset Y? (see handout on Expected Returns, Variance and Standard Deviation for formulas) 2. Portfolio Betas Security Weight Beta A B 20% 0.76 30% 1.89 C 40% 1.05 D 10% 0.34 What is the portfolio beta? Portfolio beta wi; = w1 + W22 + ... + Wnn 3. CAPM Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of 13%. What is the reward-to-risk ratio in equilibrium? . Reward-to-risk ratio in equilibrium = Market Risk Premium = E(RM) - Rf What is the expected return on the asset? Expected Return = E(RA) = Rf+ BA(E(RM) - Rf)
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