Question
There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $79. The price of Stock
There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $79. The price of Stock A next year will be $68 if the economy is in a recession, $91 if the economy is normal, and $101 if the economy is expanding. The probabilities of recession, normal times, and expansion are .24, .56, and .20, respectively. Stock A pays no dividends and has a correlation of .74 with the market portfolio. Stock B has an expected return of 14.4 percent, a standard deviation of 34.4 percent, a correlation with the market portfolio of .28, and a correlation with Stock A of .40. The market portfolio has a standard deviation of 18.4 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.) |
Return | |
Recession | % |
Normal | % |
Expansion | % |
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.) |
Expected return | % |
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.) |
Variance |
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.) |
Standard deviation | % |
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.) |
Beta of Stock A |
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.) |
Beta of Stock B |
If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? | ||||
|
b-1. | What is the expected return of a portfolio consisting of 75 percent of Stock A and 25 percent of Stock B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Expected return | % |
b-2. | What is standard deviation of a portfolio consisting of 75 percent of Stock A and 25 percent of Stock B?(Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
Standard deviation | % |
c. | What is the beta of the portfolio in part (b)? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
Beta of the portfolio |
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