Question
The following table gives the expected returns and probabilities of various states of nature for securities A and B: State Probability Return on Asset A
The following table gives the expected returns and probabilities of various states of nature for securities A and B:
State Probability Return on Asset A Return on Asset B
Boom 0.10 45% 30%
Normal 0.60 20% 25%
Recession 0.30 -10% -5%
Determine:
i. the expected return on each stock.
ii. the standard deviation of returns of each stock.
iii. the coefficient of variation for each stock.
iv. which stock is more volatile. Why
Suppose you use $1 000 000 to construct a portfolio comprising stocks A and B such that you invest $600 000 in A and $400 000 in B. Also, you have done some research and estimated the beta of the stocks to be A = 1.5 and B = 0.75. Use expected returns calculated for each stock in A., above to calculate the expected:
i. return on the portfolio.
ii. beta of the portfolio.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started