Consider the following information: Probability of State of Economy 0.54 0.46 State of Rate of Return if State Occurs Stock B 0.20 Stock C Economy Вoom Bust Stock A 0.12 0.38 -0.05 0.15 0.06 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected return 0.08 %

Consider the following information: Probability of State of Economy 0.54 0.46 State of Rate of Return if State Occurs Stock B 0.20 Stock C Economy Вoom Bust Stock A 0.12 0.38 -0.05 0.15 0.06 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected return 0.08 %

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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…
Asset W has an expected return of 8.8 percent and a beta of .90. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Do not round intermediate calculations. Enter your expected returns as a percent rounded to 2 decimal places, e.g., 32.16, and your beta answers to 3 decimal places, e.g., 32.161.) Portfolio Expected Percentage of Portfolio in Asset W Portfolio Return Beta 0 % 2.60 % 25 4.15 % 0.225 50 5.70 % 0.450 75 7.25 % 0.680 100 8.80 % 0.900 125 10.35 % 1.130 150 11.90 % 1.350 If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Slope of the line
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…
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA - 2.60 + 0.90RM + CA Rg- -2.00 + 1.20RM + eg OM- 26, R-equarea 0.21; R-squaren 0.12 Assume you create portfolio Pwith investment proportions of 0.70 in A and 0.30 in B. a. What is the standard deviation of the portfollo? (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Standard deviation b. What is the beta of your portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Portfolio beta c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal places.) Firm-specific
What is the expected return of an equally weighted portfolio comprised of the following three stocks? State ofEconomy Probability ofState of Economy Rate of Returnif State Occurs Stock A Stock B Stock C Boom .25 .19 .13 .07 Normal .72 .15 .05 .13 Bust .03
You are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21
Consider the following information about three stocks: State of Economy Probability of State of Economy Rate of Return If State Occurs Stock A Stock B Stock C Boom .25 .13 .29 .60 Normal .60 .08 .11 .13 Bust .15 .02 −.18 −.45 a-1. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.) a-3. 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.) b. If the expected T-bill rate is 3.70 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,…
Consider the following information: State of Economy Boom Bust Probability of State of Economy a. Expected return b. Variance .65 .35 Rate of Return if State Occurs 16.03 % Stock A .11 .12 Stock B .19 .06 a. What is the expected return on an equally weighted portfolio of these three stocks? (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 a portfolio invested 16 percent each in A and B and 68 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., .161616.) Stock C .37 -.05
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
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 J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092
Suppose you observe the following situation: Probability of State 0.35 0.40 0.25 State of Economy Recession Normal Irrational exuberance Stock A Stock B Expected Return 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.) -0.11 0.10 0.45 -0.09 0.10 0.25 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.65, 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 information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% i. Calculate expected return on each stock? On the basis of this measure, which stockyou will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of thismeasure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of thismeasure, which stock you will choose?

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