Question

In: Finance

) Consider the following situation: State of Economy Probability of State of Economy Returns if State...

) Consider the following situation:

State of Economy

Probability of State of Economy

Returns if State Occurs

Stock A

Stock B

Stock C

Boom

20%

25%

10%

5%

Recession

80%

-30%

5%

10%

The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium.

  1. (5 points) Which stock has the most systematic risk? Provide all the steps and equations.

  1. (5 points) Which stock has the most unsystematic risk? Explain why. Provide all the steps and equations.
  1. (10 points) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A, $3,600 in stock B, and $8,000 in stock C?
  2. ) If the expected inflation rate is 2.5%, what is the exact expected real return on the portfolio of part (c)?

Solutions

Expert Solution

a) Systematic Risk = Beta
Returns if State Occurs Expected Return
State of Economy Probability of State of Economy Stock A Stock B Stock C Prob. x Stock A 's Return Prob. x Stock A 's Return Prob. x Stock A 's Return
Boom 20.00% 25.00% 10.00% 5.00% 5.00% 2.00% 1.00%
Recession 80.00% -30.00% 5.00% 10.00% -24.00% 4.00% 8.00%
Total -19.00% 6.00% 9.00%
According CAPM Expected Return E(R)= Risk free Rate + Beta x (Market Return - Risk free Rate)
Risk Free Rate RF = 3.00%
Return on market RM 7.00%
Stock A 's Beta = -19% - 3% = Beta x (7% -3%) -5.5
Stock B 's Beta = 6% - 3% = Beta x (7% -3%) 0.75
Stock C 's Beta = 9% - 3% = Beta x (7% -3%) 1.5
Stock C has the most systematic risk because it has the highest beta.
b)
Stock A has the most unsystematic risk because it has the negative Beta.

jeff jeffy answered 7 months ago
Next > < Previous

Related Solutions

Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C Boom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium. Show your work. Do not use excel. (5 points) Which stock has the most systematic risk? Provide all the steps and equations. (5 points) Which...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C Boom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium. Which stock has the most systematic risk? Provide all the steps and equations. Which stock has the most unsystematic risk? Explain why. Provide all the...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C Boom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium. (5 points) Which stock has the most systematic risk? Provide all the steps and equations. (5 points) Which stock has the most unsystematic risk? Explain...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs...
Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock C Boom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected return on the market portfolio is 7% and the US Treasury bill yields 3%. The capital market is currently in equilibrium. (a) (5 points) Which stock has the most systematic risk? Provide all the steps and equations. (b) (5 points) Which stock has the most unsystematic...
1.Returns and Standard Deviations Consider the following information: State of Economy Probability of State of Economy...
1.Returns and Standard Deviations Consider the following information: State of Economy Probability of State of Economy Rate of Return If State Occurs Stock A Stock B Stock C Boom .10 .35 .45 .27 Good .60 .16 .10 .08 Poor .25 ?.01 ?.06 ?.04 Bust .05 ?.12 ?.20 ?.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? What is the variance of this portfolio? The...
Consider the following for returns of Stock A and B State of economy Recession Probability 0.20...
Consider the following for returns of Stock A and B State of economy Recession Probability 0.20 Stock A -0.020 Stock B. 0.034 Normal Probability 0.50 Stock A 0.138 Stock B. 0.062 Boom Probability 0.30 Stock A 0.218 Stock B 0.092 The market return is 12% the risk free rate is 5% assuming CAPM holds the market is in equilibrium the forecast E(r)= required E(R) Which stock has more total risk which stock has more systametic risk explain your answers
Suppose you observe the following situation: State of the economy Probability of state of economy Share...
Suppose you observe the following situation: State of the economy Probability of state of economy Share ABC rate of return if state occurs Share XYZ rate of return if state occurs Recession 0.20 -15% 25% Normal 0.50 10% 20% Boom 0.30 50% 10% Suppose you have $30,000 in total. If you invest $15,000 in Share ABC and the remainder in Share XYZ, what will the expected return on your portfolio be? a. The expected return in your portfolio is 17.5%....
Consider the following information: State of the Economy Probability of State of the Economy Return on...
Consider the following information: State of the Economy Probability of State of the Economy Return on A % Return on B % Boom 0.40 10 4 Growth 0.20 -4 0 Normal 0.20 24 16 Recession 0.20 16 20 a)         What is the expected return for A? For B?                                          b)         What is the standard deviation for A? For B?                                     c)         What is the expected return on a portfolio of A and B that is 30% invested in A and the remainder...
Consider the following information on 3 stocks. State of the economy Probability of state of economy...
Consider the following information on 3 stocks. State of the economy Probability of state of economy Return of stock A Return of Stock B Return of Stock C Recession 0.20 .24 .36 .55 Normal 0.55 .17 .13 .09 Boom 0.25 0 -.28 -.45 If your portfolio is invested 40% in A , 40% in B and 20% in C. What is the portfolio expected return? What is the portfolio standard deviation? If the expected t-bill rate is 3.8%, what is...
Consider the following information: State of Economy Probability of State of Economy Rate of Return if...
Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession .04 .097 .102 Normal .72 .114 .133 Boom .24 .156 .148 The market risk premium is 7.4 percent, and the risk-free rate is 3.1 percent. The beta of Stock A is ________ and the beta of Stock B is ________. a) 1.25; 1.41 b) 1.47; 1.76 c) 1.21; 1.76 d) 1.25; 1.89 e) 1.47; 1.41
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT