Question
In: Finance
Use the information in the table below (related to Tostitos Corp.) to answer the following questions...
-
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
-
What is the expected return for Tostitos Corp.’s stock? [3 points]
-
What is the Tostitos Corp’s standard deviation of returns? [4 points]
-
What is the 95% confidence interval associated with the returns of Tostitos Corp.’s
stock? [3 points]
- 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
-
-
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]
-
What is the standard deviation of returns of this portfolio? [3 points]
-
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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