Roenfeld Corp believes the following probability distribution exists for its stock. 25% chance of boom economy and stock's return of 25%

Part A: Which of the following is incorrect?

a. Risk Premium is the difference between the return on a risky asset and a risk-free asset, which serves as compensation for investors to hold riskier securities.

b. The risk premium demanded by investors has historically been larger for the stock market than the corporate bond market

c. The risk premium demanded by investors has historically been larger for the small stocks than the large stocks

d. From the investment perspective, small stocks seem to be better investment choice than big stocks.

Part B: Roenfeld Corp believes the following probability distribution exists for its stock. 25% chance of boom economy and stock's return of 25%, 50% chance of normal economy and return of 15%, and 25% chance of reccesion with a 5% return. What is the standalone risk in terms of standard deviation?

		a.0.07
		b. 0.6060
		c. 0.5050
		d. 0.4545
		e. 0.4292

Expert Solution

Part A) Incorrect Option is D

As for investment perspective Large stocks are betther as they are less Risky and hence has high probability of providing higher return whereas small stocks are Very Risky hence high uncertainty regarding Future Returns .

All other options A, ,B, C are Correct

Part B )Correct Option is A).07 Approx

jeff jeffy answered 2 years ago

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