MC algo 11-11 Expected Return There is 11 percent probability of recession, 14 percent probability of a poor economy, 52 percent probability of a normal economy, and 23 percent probability of a boom. A stock has returns of -20.1 percent, 3.7 percent, 11.5 percent and 27.2 percent in these states of the economy, respectively. What is the stock's expected return? 10.54% O 9.66% 0 12.75% O 5.58% O 14.97% MC algo 11-14 Calculating Variance A stock will have a loss of 9.9 percent in a bad economy, a return of 9.7 percent in a normal economy, and a return of 23.6 percent in a hot economy. There is 21 percent probability of a bad economy, 48 percent probability of a normal economy, and 31 percent probability of a hot economy. What is the variance of the stock's returns? O 11855 0.01405 0.01054 O 02811 0.02108 MC algo 11-15 Calculating Standard Deviation If the economy booms, Meyer&Co. stock will have a return of 21.3 percent. If the economy goes into a recession, the stock will have a loss of 13.6 percent. The probability of a boom is 62 percent while the probability of a recession is 38 percent. What is the standard deviation of the returns on the stock? 13.36% O 9.63% O 14.57% O 16.94% 15.70% Problem 11-26 Covariance and Correlation Based on the following information: State of Economy Bear Normal Bull Probability of State of Economy .27 .62 11 Return on Stock J -.018 140 220 Return on Stock K .036 .064 .094 Calculate the expected return for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return Stock J Stock K Calculate the standard deviation for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Stock J Stock K What is the covariance between the returns of the two stocks? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.) Covariance What is the correlation between the returns of the two stocks? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Correlation MC algo 11-3 Portfolio Weights You own 400 shares of Stock X at a price of $37 per share, 270 shares of Stock Y at a price of $60 per share, and 335 shares of Stock Z at a price of $83 per share. What is the portfolio weight of Stock ? 2517 4728 4053 3099 2755 MC algo 11-5 Portfolio Expected Return A portfolio consists of $13,600 in Stock M and $19,400 invested in Stock N. The expected return on these stocks is 8.10 percent and 11.70 percent, respectively. What is the expected return on the portfolio? O 8.79% O 10.96% O 9.90% Oo O 10.22% O 9.58% MC algo 11-38 Portfolio Expected Return You decide to invest in a portfolio consisting of 25 percent Stock A, 25 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Recession Normal Boom Probability of State of Economy 16 55 29 Return if State Occurs Stock A Stock B Stock C 16.4% - 2.7% - 21.6% 12.6% 7.3% 15.9% 26.2% 14.6% 30.5% 13.09% 12.00% 15.47% 14.18% 0 12.54% Daforon MC algo 11-39 Portfolio Variance You decide to invest in a portfolio consisting of 18 percent Stock A, 49 percent Stock B, and the remainder in Stock C. Based on the following information, what is the variance of your portfolio? State of Economy Recession Normal Boom Probability of State of Economy 123 .683 194 Return If State Occurs Stock A Stock B Stock C - 11.00% - 4.40% -13.40% 10.30% 10.84% 17.80% 21.73% 25.47% 30.17% 01037 .00917 00853 0.00963 0.01238 MC algo 11-40 Portfolio Standard Deviation You decide to invest in a portfolio consisting of 17 percent Stock X, 38 percent Stock Y, and the remainder in Stock Z. Based on the following information, what is the standard deviation of your portfolio? Probability of State Return of State Occurs State of Economy of Economy Stock X Stock Y Stock z Normal .75 9.20% 2.60% 11.60% Boom 25 16.50% 24.50% 16.00% O 7.29% O 6.25% O 2.50% O 1.87% O 5.00% Problem 11-28 Portfolio Standard Deviation Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .085, E(R3) = 145, 0A = 355, and 0g = .615. a-1. Calculate the expected return of a portfolio that is composed of 30 percent Stock A and 70 percent Stock B when the correlation between the returns on A and B is 45. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return % a-2. Calculate the standard deviation of a portfolio that is composed of 30 percent Stock A and 70 percent Stock B when the correlation between the returns on A and B is 45. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation % b. Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation coefficient between the returns on Stocks A and B is - 45. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation %