Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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?
Stock B
Stock A

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Options Futures And Other Derivatives

Authors: John C. Hull

9th Edition

0133456315, 9780133456318

More Books

Students also viewed these Finance questions