If you decide to invest in both stocks, and you decide to put 50% in stock A and the Remainder in B, what will be your Portfolio Expected Return and the volatility of the portfolio? States of the Economy Probability Asset A (RA) Asset B (RB) Recession 60 20 35 Normal 20 17 27 Boom 20 14 40
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- If you decide to invest in both stocks, and you decide to put 50% in stock A and the Remainder in B, what will be your Portfolio Expected Return and the volatility of the portfolio?
| States of the Economy | Probability | Asset A (RA) | Asset B (RB) |
| Recession | 60 | 20 | 35 |
| Normal | 20 | 17 | 27 |
| Boom | 20 | 14 | 40 |
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- Compute the risk and return of the above two stocks and justify using your answers as well as any other empirical computation which of the two stocks you prefer. States of the Economy Probability Asset A (RA) Asset B (RB) Recession 60 20 35 Normal 20 17 27 Boom 20 14 40Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance…
- a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of…USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Investment Beta Analyst's Estimated Return Stock X 2.3 15.5% Stock Y 1.2 13.6% Market Portfolio 1.0 11.5% Risk-free rate 4.0% What is the required rate of return for Stock X based on the capital asset pricing model (CAPM)?Consider the following information: State of Probability of Rate of Return if State Occurs Economy State of Economy Stock A Stock B Stock C Boom .19 .366 .466 .346 Good .41 .136 .116 .186 Poor Bust .31 .09 .026 -.126 036 -.266 -.091 -.106 a. Your portfolio is invested 31 percent each in A and C and 38 percent in B. What is the expected return of the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the variance of this portfolio? Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161. c. What is the standard deviation of this portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Expected return b. Variance c. Standard deviation % I1%
- Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Stock C Boom .15 .35 .45 .27 Good .55 .16 .10 .08 Poor .25 -.01 -.06 -.04 Bust .05 -.12 -.20 -.09 a) Your portfolio is invested 40 percent each in A and C, and 20 percent in B. What is the expected return of the portfolio? b) What is the variance of this portfolio? The standard deviation? Stock C .45 .27 .10 .08 -.06 -.04 -.20 -.09State ofEconomy Probabilityof State Return on AssetDin State Return on AssetEin State Return on AssetFin State Boom 0.35 0.060 0.310 0.25 Normal 0.50 0.060 0.180 0.20 Recession 0.15 0.060 -0.210 0.10 1.As an investor, compare Stock E with Stock F, and identify which stock willyou select and why.Suppose you observe the following situation: Probability of State 0.25 0.45 0.30 State of Economy Recession Normal Irrational exuberance Stock A Stock B % % Rate of Return if State Occurs Stock B Stock A a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) Expected Return % -0.12 0.09 0.44 -0.10 0.09 0.24 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.75, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium
- Consider the following information: Rate of Return if State Occurs Probability of State of Economy .15 State of Economy Stock A Stock B Stock C Вoom .35 .40 .28 Good .45 .16 .17 .09 Рor .30 -.01 -.03 .01 Bust 10 -10 -12 -.09 Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.) b-2. What is the standard deviation? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) а. a. Expected return % b-1. Variance b-2. Standard deviation %Consider the following information in Figure 1 below for a portfolio including security A and security B: Figure 1 State of the economy Probability of state of economy Return on A (%) Return on B (%) Boom 0.2 15 5 Growth 0.2 -5 0 Normal 0.5 10 10 Recession 0.1 5 20 If you want to include one more security C into the above portfolio. (e.g., a new portfolio including securities A, B, and C), what is the new portfolio variance if you invest 40% of C and 60% of the old portfolio including A and B (50% weights for A and B)? Assume the standard deviation of C is 10%, and correlation coefficient between the old portfolio and C is 0.8.Beta coefficients and the capital asset pricing model Suppose you are wondering how much risk you must undertake to generate an acceptable return on your investment portfolio. The risk-free return currently is 3%. The return on the overall stock market is 12%. Use the CAPM to calculate how high the beta coefficient of your investment portfolio would have to be to achieve each of the following expected portfolio returns. a.13% b. 25% c. 16% d. 18% e. Assume you are averse to risk. What is the highest return you can expect if you are unwilling to take more than an average risk?
