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8. (25 points) Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C
8. (25 points) Consider the following situation:
State of Economy | Probability of State of Economy | Returns if State Occurs | ||
Stock A | Stock B | Stock C | ||
Boom | 20% | 25% | 10% | 5% |
Recession | 80% | -30% | 5% | 10% |
The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.
- (5 points) Which stock has the most systematic risk? Provide all the steps and equations.
- (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.
- (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?
- (5 points) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?
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