Expected Rate of Return

Scenario Probalility T-Bills S&P 500 Utility Company High Tech Company Counter Cyclical Company

Recession

Scenario	Probalility	T-Bills	S&P 500	Utility Company	Tech Company	Counter Cyclical Company
Recession	20%	5%	-10%	6%	-25%	20%
Near Recession	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%

Based on the above returns, Jenna calculated the betas of the three stocks as follows:

Beta of Utility Company= 0.22

Beat 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.

• Kevin has no idea what beta means and how it is related to the required return of the stocks. Help him understand these concepts.
• 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? What is the risk and return? Would this combination be better for him? Explain.

Expected Rate of Return Scenario Probalility T-Bills S&P 500 Utility Company High Tech Company Counter Cyclical Company Recession Scenario Probalility T-Bills S&P 500 Utility Tech Counter Company Company Cyclical Company Recession 20% 5% -10% 6% -25% 20% Near Recession 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% Based on the above returns, Jenna calculated the betas of the three stocks as follows: Beta of Utility Company= 0.22 Beat 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. 1. 2. Kevin has no idea what beta means and how it is related to the required return of the stocks. Help him understand these concepts. 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? What is the risk and return? Would this combination be better for him? Explain