Question

In: Finance

Use the information in the table below (related to Tostitos Corp.) to answer the following questions...

  1. Use the information in the table below (related to Tostitos Corp.) to answer the following questions

    Economic State

    Probability (%) Return (%)

    Deep Recession

    10

    -15

    Recession

    20

    -10

    Normal Economy

    50

    2

    Economic Expansion

    20

    15

  2. What is the expected return for Tostitos Corp.’s stock? [3 points]

  3. What is the Tostitos Corp’s standard deviation of returns? [4 points]

  4. What is the 95% confidence interval associated with the returns of Tostitos Corp.’s

    stock? [3 points]

  5. You form a two-stock portfolio by combining Tostitos Corp.’s stock (from Question 3 above) along with the stock of TD Bank. TD Bank has a marginal tax rate of 25% and a cost of debt of 3.25%. TD Bank’s stock has an expected return of 9%, a standard deviation of returns of 25%, and a correlation coefficient with Tostitos Corp.’s returns of 0.65
    1. If you wish to create a portfolio with an expected return of 5%, what is the weight of each of Tostitos Corp. and TD Bank that you would hold? [4 points]

    2. What is the standard deviation of returns of this portfolio? [3 points]

    3. What is the 95% confidence interval associated with this portfolio? [3 points]

Solutions

Expert Solution

Calculation of Expected Return
Economic State Probability (%) (A) Return (%) (B) Expected Return(%)    (A)*(B)
Deep Recession                          10.00                 (15.00)                                               (1.50)
Recession                          20.00                 (10.00)                                               (2.00)
Normal Economy                          50.00                     2.00                                                1.00
Economy expension                          20.00                  15.00                                                3.00
Expected Return                                                0.50
Calculation of Standard Deviation
Economic State Probability (%) (A) Return (%) (X)        (X- Expected Return)        (X- Expected Return)^2    (A)*(X- Expected Return)^2
Deep Recession                          10.00                 (15.00)                                  (15.50) 240.25                                           24.03
Recession                          20.00                 (10.00)                                  (10.50) 110.25                                           22.05
Normal Economy                          50.00                     2.00                                      1.50 2.25                                              1.13
Economy expension                          20.00                  15.00                                   14.50 210.25                                           42.05
Variance                                           89.25

Standard Deviation = variance^1/2

= 89.25^1/2

Standard Deviation = 9.45

95% confidence interval associated with the return is Calculated using Table of Normal Distribution

Therefore,

95% confidence interval associated with the return is 9.26


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