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Problem 3 Scenario Analysis (33 points) Use the following scenario analysis for stocks X and Y to answer the questions. Round to the nearest 1/100

Problem 3 Scenario Analysis (33 points)

Use the following scenario analysis for stocks X and Y to answer the questions. Round to the nearest 1/100 of 1% (i.e., 15.07%).

Bear

Normal

Bull

Market

Market

Market

Probability

35.00%

55.00%

10.00%

Stock X

-20.00%

11.00%

28.00%

Stock Y

-17.00%

16.00%

49.00%

3.a) What are the expected rates of return for stocks X and Y (9 points)?

3.b) What are the standard deviations for of returns for stocks X and Y (8 points)?

3.c) If the riskfree rate of return is 2.50%, what are the Sharpe Ratios for stocks X and Y (8 points)? (Please assume that the standard deviations of the excess returns are the same as the standard deviations of returns calculated in part b.)

3.d) Assume you have a $200,000 portfolio and you invest $75,000 in stock X and the remainder in stock Y. What is the expected return for this portfolio (8 points)?

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