Question
Probability of the state of economy Rate of return if state occurs Stokk SSS Recession 0.4 4% Boom 0.6 18% Consider following information. a) Calculate
| Probability of the state of economy | Rate of return if state occurs Stokk SSS | |
| Recession | 0.4 | 4% |
| Boom | 0.6 | 18% |
Consider following information.
a) Calculate the expected return of a stock.
b) Calculate the standard deviation of a stock return.
c) If the risk-free rate is 2% what is the expected portfolio return invested 75% in stock SSS and 25% in risk-free asset?
d) Discuss what do we mean by systematic and unsystematic risk. What is the effect of diversification?
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
a To calculate the expected return of a stock we multiply the probability of each state of the economy by its corresponding rate of return and sum them up Expected return Probability of Recession Rate ...
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Step: 2
Step: 3
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Intermediate Financial Management
Authors: Eugene F. Brigham, Phillip R. Daves
11th edition
978-1111530266
