Question
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $65. The price of Stock A
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $65. The price of Stock A next year will be $53 if the economy is in a recession, $73 if the economy is normal, and $85 if the economy is expanding. The probabilities of recession, normal, and expansion are 0.2,0.6, and 0.2 respectively. Stock A pays no dividends and has a beta of 0.68. Stock B has an Expected return of 13%, a standard deviation of 34%, a beta of 0.45 and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds.
A. What are the expected return and standard Deviations of Stock A?
B. If you are a typical, risk-averse investor with a well diversified portfolio, which stock would you prefer and why?
C. What are the expected return and Standard deviations of a portfolio consisting of 60% stock A and 40% Stock B?
D. What is the beta of the portfolio in (c)?
Please show all work! It is important that i understand how to do this process.
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