34 points

Question 3

Problem 3 Scenario Analysis (33 points)

Use the following scenario analysis for stocks X and Y to answer the questions. Round to the nearest 1/100 of 1% (i.e., 15.07%).

	Bear	Normal	Bull
	Market	Market	Market
Probability	35.00%	50.00%	15.00%
Stock X	-15.00%	9.00%	21.00%
Stock Y	-22.00%	14.00%	48.00%

3.a) What are the expected rates of return for stocks X and Y (9 points)?

3.b) What are the standard deviations for of returns for stocks X and Y (8 points)?

3.c) If the riskfree rate of return is 1.50%, what are the Sharpe Ratios for stocks X and Y (8 points)? (Please assume that the standard deviations of the excess returns are the same as the standard deviations of returns calculated in part b.)

3.d) Assume you have a $150,000 portfolio and you invest $60,000 in stock X and the remainder in stock Y. What is the expected return for this portfolio (8 points)?