Question
In: Finance
State of Economy Probability of State of Economy Return of Stock A if State Occurs Return...
|
State of Economy |
Probability of State of Economy |
Return of Stock A if State Occurs |
Return of Stock B if State Occurs |
|
Recession |
0.30 |
-0.20 |
0.10 |
|
Normal |
? |
0.30 |
0.20 |
|
Boom |
0.15 |
0.40 |
0.30 |
What is the expected return for Stock A?
What is the standard deviation for Stock A?
Suppose you have $50,000 total. If you put $20,000 in Stock A and the remainder in Stock B, what are the portfolio returns in each state?
Suppose you have $50,000 total. If you put $20,000 in Stock A and the remainder in Stock B, what will be the expected return of your portfolio?
Suppose you have $50,000 total. If you put $20,000 in Stock A and the remainder in Stock B, what will be the standard deviation of your portfolio?
Solutions
Expert Solution
| State of economy | A | B | ||||||
| Recession | -20.00% | 10.00% | ||||||
| Normal | 30.00% | 20.00% | ||||||
| Boom | 40.00% | 30.00% | ||||||
| Probability of normal market= | (100%-30%-15%)=55% | |||||||
| Computation of expected return (A-100%, B-0%) | ||||||||
| 100% | 0% | Average return= Probability * return | Deviation= Return less average return | Deviation^2 | Deviation^2*Probability | |||
| State of economy | Probability | A | B | Portfolio | Portfolio | Portfolio | Portfolio | Stock A |
| Return*weight | ||||||||
| Recession | 30.00% | -20.000% | 0.00% | -20.000% | -6.00% | -36.50% | 13.323% | 3.9968% |
| Normal | 55.00% | 30.000% | 0.00% | 30.000% | 16.50% | 13.50% | 1.823% | 1.0024% |
| Boom | 15.00% | 40.000% | 0.00% | 40.000% | 6.00% | 23.50% | 5.523% | 0.8284% |
| Total | 16.50% | 5.8275% | ||||||
| Expected return-Portfolio | 16.50% | |||||||
| Variance-Portfolio | 5.8275% | |||||||
| Standard deviation-Portfolio | 24.1% | Variance ^0.5 | ||||||
| Total investment | $ 50,000 | |||||||
| Investment in A | $ 20,000 | |||||||
| Investment in A | 20000/50000 | 40% | ||||||
| Investment in B | 60% | |||||||
| Computation of expected return (A-40%, B-60%) | ||||||||
| 40% | 60% | Average return= Probability * Portfolio return | Deviation= Portfolio Return less average return | Deviation^2 | Deviation^2*Probability | |||
| State of economy | Probability | A | B | Portfolio | Portfolio | Portfolio | Portfolio | Stock A |
| Return*weight | ||||||||
| Recession | 30.00% | -8.000% | 6.00% | -2.000% | -0.60% | -19.70% | 3.881% | 1.1643% |
| Normal | 55.00% | 12.000% | 12.00% | 24.000% | 13.20% | 6.30% | 0.397% | 0.2183% |
| Boom | 15.00% | 16.000% | 18.00% | 34.000% | 5.10% | 16.30% | 2.657% | 0.3985% |
| Total | 17.70% | 1.7811% | ||||||
| Expected return-Portfolio | 17.70% | |||||||
| Variance-Portfolio | 1.7811% | |||||||
| Standard deviation-Portfolio | 13.3% | Variance ^0.5 |
jeff jeffy answered 3 years agoRelated Solutions
State of Economy Probability of State of Economy Return of Stock A if State Occurs Return...
State of Economy
Probability of State of Economy
Return of Stock A if State Occurs
Return of Stock B if State Occurs
Recession
0.20
-0.20
0.05
Normal
?
0.20
0.22
Boom
0.25
0.30
0.25
What is the expected return for Stock A?
What is the standard deviation for Stock A?
Suppose you have $50,000 total. If you put $10,000 in Stock A
and the remainder in Stock B, what are the portfolio returns in
each state?
Suppose you have $50,000...
Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A...
Rate of Return if State Occurs State of Economy Probability of
State of Economy Stock A Stock B Recession .25 .03 −.15 Normal .55
.13 .13 Boom .20 .16 .33 a. Calculate the expected return for the
two stocks. (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places.) b. Calculate the
standard deviation for the two stocks. (Do not round your
intermediate calculations. Enter your answers as a percent rounded
to 2 decimal...
Rate of return if state occurs State of economy Probability of state of economy Stock A...
Rate of return if state occurs
State of economy
Probability of state of economy
Stock A
Stock B
Stock C
Boom
0.3
0.35
0.45
0.38
Good
0.3
0.15
0.20
0.12
Poor
0.3
0.05
–0.10
–0.05
Bust
0.1
0.00
–0.30
–0.10
5. Consider the
following information on three stocks in four possible future
states of the economy:
Your portfolio is invested 30% in A, 50% in B, and 20% in C.
What is the expected return of your portfolio?
What...
Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A...
Rate of Return if State Occurs
State of Economy
Probability of
State of Economy
Stock A
Stock B
Stock C
Boom
0.70
0.25
0.19
0.09
Bust
0.30
0.09
0.09
0.03
a. What is the expected return on an equally
weighted portfolio of these three stocks?
b. What is the variance of a portfolio invested
30 percent each in A and B and 40 percent in C?
Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A...
Rate of Return If State Occurs
State of
Probability of
Economy
State of Economy
Stock A
Stock B
Stock C
Boom
.15
.39
.49
.29
Good
.55
.15
.20
.08
Poor
.25
−.01
−.09
−.07
Bust
.05
−.20
−.24
−.10
a.
Your portfolio is invested 24 percent each in A and C, and 52
percent in B. What is the expected return of the portfolio?
(Do not round intermediate calculations and enter your
answer as a percent rounded to...
Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A...
Rate of Return if State Occurs
State of Economy
Probability of State of Economy
Stock A
Stock B
Stock C
Boom
.25
.19
.35
.28
Good
.30
.14
.13
.14
Poor
.10
.00
−.10
−.05
Bust
.35
−.20
−.28
−.13
a. Your portfolio is invested 35 percent each
in Stocks A and C and 30 percent in Stock B. What is the expected
return of the portfolio? (Do not round intermediate
calculations. Enter your answer as a percent rounded to...
Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A...
Rate of Return If State Occurs
State of
Probability of
Economy
State of Economy
Stock A
Stock B
Stock C
Boom
.25
.21
.33
.55
Normal
.60
.17
.11
.09
Bust
.15
.00
−
.21
−
.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.,...
Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A...
Rate of Return if State Occurs
State of Economy
Probability of
State of Economy
Stock A
Stock B
Stock C
Boom
0.76
0.29
0.33
0.31
Bust
0.24
0.15
0.11
0.09
Requirement 1:
What is the expected return on an equally weighted portfolio of
these three stocks? (Do not round your intermediate
calculations.)
26.36%
28.86%
38.39%
41.16%
20.63%
Requirement 2:
What is the variance of a portfolio invested 20 percent each in
A and B and 60 percent in...
State of Economy Probability of State of Economy Return on Stock J Return on stock K...
State of Economy
Probability of State of Economy
Return on Stock J
Return on stock K
Bear
.23
-.013
.041
Normal
.58
.145
.069
Bull
.19
.225
.099
What is the Convariance and Correlation between
the returns of the 2 stocks?
Consider the following information: Rate of Return If State Occurs State of Probability of Economy...
Consider the following information:
Rate of Return If State Occurs
State of
Probability of
Economy
State of Economy
Stock A
Stock B
Stock C
Boom
.75
.08
.17
.24
Bust
.25
.11
−
.05
−
.08
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...
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