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Assume that there are assets - stock A and T-bill (risk-free asset) along with the market. The Tbill's return rate is 5%. Market portfolio has
Assume that there are assets - stock A and T-bill (risk-free asset) along with the market. The Tbill's return rate is 5\%. Market portfolio has an expected return of 8% and standard deviation of 0.08 . Price of stock A is $10 now. During next period, rate of return of the stock A will be 50% if the economy expands, 20% if the economy is normal and 20% if the economy falls in the recession. The probabilities that the economy is expanding, being normal or in a recession are 0.3,0.6 and 0.1 respectively. The variance of the stock A's return is 0.0453 . Correlation between return of Stock A and the market is 0.5 . The stock A pays no dividends. a) What is the expected return rate of stock A ? b) What is the standard deviation of stock A's return? c) What is the beta of stock A ? d) What are the weights of stock A and T-bill if you want to construct a portfolio with beta equals 1 ? e) Based on the result in part (d), what is the expected return of this portfolio? (5 marks) (5 marks) (5 marks) (3 marks) (2 marks)
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