Problem 1 Intro An investment costs $80 and offers a payoff of $100 with probability p and 0 with probability 1-p. Time-equivalent Treasuries offer an interest rate of 8%. Assume risk neutrality, i.e. the expected return on any security of the same time duration should be the same regardless of how risky the payoff is. Part 1 Attempt 1/2 for 10 pts. What is the promised return of the investment? 3+ decimals Submit Part 2 Attempt 1/2 for 10 pts. What is the probability of default? 2+ decimals SubmitProblem 4 Intro A stock has a beta of 1.5. The risk-free rate is 4%%. Assume that the CAPM holds. Part 1 1 8 Attempt 1/2 for 10 pts. What is the expected return for the stock if the expected return on the market is 10%%? 3+ decimals Submit Part 2 1 8 P Attempt 1/2 for 10 pts. What is the expected return for the stock if the expected market risk premium is 10%%? 3+ decimals SubmitProblem 2 H Intro We know the following expected returns for stocks A and B, given different states of the economy: State (s) Probability E(rA,:) E([B,8) Recession 0.2 -0.1 0.02 Normal 0.5 0.08 0.05 Expansion 0.3 0.13 0.07 Part 1 7 8 | Attempt 1/2 for 10 pts. What is the expected return for stock A? 3+ decimals SubmitProblem 3 Intro We know the following expected returns for stocks A and B. given different states of the economy. State (s) Probability E(rA,) E(FB,c) Recession 0.3 -0.03 0.05 Normal 0.5 0.12 0.08 Expansion 0.2 0.2 0.12 Note: If you can, it is much faster to solve these problems in a spreadsheet. However, the answer cannot be had simply by using the built-in AVERAGE() or STDEVO functions. If you are somewhat familiar with Excel, you might look into the SUMPRODUCT() function which is widely used to calculate weighted sums. Part 1 8 / Attempt 1/2 for 10 pts. What is the expected return for stock A? 3+ decimals Submit Part 2 8 / Attempt 1/2 for 10 pts. What is the expected return for stock B? 3+ decimals Submit Part 3 Attempt 1/2 for 10 pts. What is the standard deviation of returns for stock A? 3+ decimals Submit Part 4 Attempt 1/2 for 10 pts. What is the standard deviation of returns for stock B? 4+ decimals Submit