Question
Based on the attached returns, Jenna calculated the betas of the three stocks as follows: Beta of Utility Company = 0.22 Beta of High-Tech Company
Based on the attached returns, Jenna calculated the betas of the three stocks as follows:
Beta of Utility Company = 0.22
Beta of High-Tech Company = 2.02
Beta of Counter-Cyclical Company = -1.13
Imagine you are Jenna. Prepare a report for Kevin to help him understand the concepts of risk and return. Include the following things in your report (dont just copy from the textbook, explain things in your own words):
1.How would you explain to Kevin the relationship between risk and return of individual stocks?
2.Kevin has no idea what beta means and how it is related to the required return of the stocks. Help him to understand these concepts.
3.How would you demonstrate the meaning and advantages of diversification to Kevin?
4.If Kevin decided to invest his money equally in high-tech and counter-cyclical stocks, what would his portfolios expected return and risk level be? Calculate the expected return and the beta of this portfolio to answer the question.
5.What would happen if Kevin were to put 70% of his portfolio in the high-tech stock and 30% in the S&P 500 Index fund? Would this combination be better for him? Explain. Calculate the expected return and the beta of this portfolio to answer the question.
Expected returns scenario probabilityt-bills S&P utility com high tech counter-cyclical company recession 20% 5% -10% 6% -25% 20% near recess 20% 5% -6% 7% 20% 16% normal 30% 5% 12% 9% 15% 12% near boom 10% 5% 15% 11% 25% -9% boom 20% 5% 20% 14% 35% -20%Step by Step Solution
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