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Problem 11-37 Standard Deviation and Beta There are two stocks in the market, Stock A and Stock B. The price of Stock A today is
Problem 11-37 Standard Deviation and Beta There are two stocks in the market, Stock A and Stock B. The price of Stock A today is \$77. The price of Stock A next year will be $66 if the economy is in a recession, $89 if the economy is normal, and $99 if the economy is expanding. The probabilities of recession, normal times, and expansion are .22 .58 , and .20 , respectively. Stock A pays no dividends and has a correlation of 72 with the market portfolio. Stock B has an expected return of 14.2 percent, a standard deviation of 34.2 percent, a correlation with the market portfolio of .26 , and a correlation with Stock A of .38. The market portfolio has a standard deviation of 18.2 percent. Assume the CAPM holds. a-1. What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.)
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