Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has...

Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You obtain the following forecasted returns data for West Coast Bank (WCB) for next year. Assume the possibility of different states of the economy is the same for the next year.

Recession ECB 40% WCB 40% Below average ECB -10% WCB 15% Average ECB 35% WCB -5% Above average ECB -5% WCB -10% Booming ECB 15% WCB 35%

a) Calculated the expected return and stand-alone risk for ECB and WCB respectively

b) Based on your calculation in part a), would you recommend your uncle to do a portfolio of ECB and WCB? Explain.

c)Assume that for now, the market return is 7% and the risk-free return is 2%. What is the beta of stock ECB and stock WCB respectively? Assume the two stocks are in equilibrium.

d) Please comment on your uncle's opinion that ECB has very little risk. Briefly state your reasons.

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jeff jeffy answered 2 months ago

Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has...

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Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has...

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