Question
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $84. The price of Stock A
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $84. The price of Stock A next year will be $73 if the economy is in a recession, $96 if the economy is normal, and $106 if the economy is expanding. The probabilities of recession, normal times, and expansion are .29, .51, and .20, respectively. Stock A pays no dividends and has a correlation of .79 with the market portfolio. Stock B has an expected return of 14.9 percent, a standard deviation of 34.9 percent, a correlation with the market portfolio of .33, and a correlation with Stock A of .45. The market portfolio has a standard deviation of 18.9 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-2. | What is the expected return of Stock A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
a-3. | What is the variance of Stock A? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) |
a-4. | What is the standard deviation of Stock A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
a-5. | What is the beta of Stock A? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
a-6. | What is the beta of Stock B? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
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