Question
Sam has $10,000 and is considering investing in two stocks - HSCC and Sixcent. The table below shows the returns of the stocks under different
Sam has $10,000 and is considering investing in two stocks - HSCC and Sixcent. The table below shows the returns of the stocks under different possible scenarios: a) Calculate the expected rate of return, variance and standard deviation of HSCC & Sixcent. b) Suppose Sam forms a portfolio with the stocks of HSCC and Sixcent. If he wants the portfolio to have 9.26% expected return, how much should he invest in HSCC? Calculate the variance and standard deviation of this portfolio given the covariance between HSCC and Sixcent is - 0.003 (or -30%2 ). c) Explain why the risk of Sams portfolio is lower than the weighted average risk of HSCC and Sixcent. d) Suppose the risk-free rate is 2.5%, the market risk premium is 8% and the betas for HSCC and Sixcent are 0.45 and 1.55 respectively. Using the CAPM model, estimate the required rates of return of HSCC & Sixcent. e) Determine if the two stocks are overpriced or underpriced and which (if any) should be purchased. f) Sixcent is having higher beta while HSCC is having larger standard deviation. Explain why the results of beta and standard deviation can be different even though both of them are measuring risk.
State of Affair Probability HSCC Sixcent Pandemic (long period of lockdown) 0.25 2% 20% Pandemic (short period of lockdown) 0.3 5% 10% No Pandemic 0.45 18% 2%Step by Step Solution
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