Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Because of the outbreak of COVID-19, you expect that the likelihood of economic recession for 2021 would be as high as 60%. Based on this

Because of the outbreak of COVID-19, you expect that the likelihood of economic recession for 2021 would be as high as 60%. Based on this basic forecast, you further estimate the returns for three stocks when the economy state is either boom or recession. Your estimation is as follow:

Economic state Probability of State of Economy Returns if state occurs

Stock A Stock B Stock C

Boom 0.40 30% 20% 8%

Recession 0.60 -10% 0% 2%

The market risk premium is 4.5%, and the risk-free rate is 1.5%.

a. Which stock has the highest systematical risk, please show the calculation? (5 marks)

b. Which stock has the highest total risk, please show the calculation? (5 marks)

c. Based on your answers in (a) and (b), which stock do you think should have the highest expected return? Why? (2 marks)

d. If your portfolio is invested 30% in A, 30% in B, and 40% in C, what is the portfolio expected return? The standard deviation? (5 marks)

e. Given the portfolio information in (d), what is the portfolios market beta?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jeff Madura

6th Edition

0134082915, 9780134082912

More Books

Students also viewed these Finance questions