Question

In: Finance

Price Today, A Price Today, B State Tomorrow Probability Price Tomorrow, A Price Tomorrow, B 30...

Price Today, A	Price Today, B	State Tomorrow	Probability	Price Tomorrow, A	Price Tomorrow, B
30	20	Good	0.5	60	40
		Bad	0.5	15	5

1a). Given the following information, calculate the correlation coefficient between the returns on

stocks A and B

a. 0

b. 0.25

c. 0.5

d. 0.75

e. 1

1b). Calculate expected return and standard deviation of the portfolio that is allocated 40% to A, 60% to B.

Expert Solution

Correlation coefficient between the returns on stock A and stock B is calculated in excel and screen shot provided below:

Correlation coefficient between the returns on stock A and stock B is 1.

Option (E) is correct answer.

1(b)

Expected return and standard deviation of stock A is calculated in excel and screen shot provided below:

Expected return of stock A is 25% and standard deviation is 75%.

Expected return and standard deviation of stock B is calculated in excel and screen shot provided below:

Expected return of stock B is 12.50% and standard deviation is 87.50%.

Expected return of portfolio = (40% × 25%) + (60% × 12.50%)

= 10% + 7.50%

= 17.50%

Expected return of portfolio is 17.50%.

jeff jeffy answered 3 years ago

Problem 3 Assume that the probability of rain tomorrow is 0.5 if it is raining today,...

Problem 3 Assume that the probability of rain tomorrow is 0.5 if it is raining today, and assume that the probability of its being clear (no rain) tomorrow is 0.9 if it is clear today. Also assume that these probabilities do not change if information is also provided about the weather before today. a) Find the n-step transition matrix for n = 3, 7, 10, 20. b) The probability of rain today is 0.5 Use the results in the part...

The price of Stock A today is 50, and stock B is 100. The probability of...

The price of Stock A today is 50, and stock B is 100. The probability of a booming, normal, and recessionary economy are 0.2, 0.7, and 0.1 respectively. If the economy is booming, stock’s A price will be 65 and stock B will be 108. If the economy is normal, stock’s A price will be 55 and stock’s B will be 105. If the econ falls into recession, stock’s A price will be 40 and stock’s B will be 102....

state of economy probability state of econ return stock a return stock b depression .10 -30%...

state of economy probability state of econ return stock a return stock b depression .10 -30% 0% recession .20 -10% 5% normal .5 20% 20% boom .2 50% -5% a. calculate the expected returns of stock a and stock b b. what are the stand-alone risk of stock a and stock b c. calculate the coefficient of variation of stock a CVa and stock b CVb d. Suppose the market is in equilibrium (That is, required returns equal expected returns)....

State Probability A B &nb

State Probability A B Boom .25 12% 4% Bust .75 6% 18% what is the standard deviation of the return on the portfolio?

State of Nature………..Probability…………….State Dependent Return A………….State Dependent Return B Recession……………………..70%................................-0.08………………………………………………-0.04 Expansion.....................30%.................................0.28………………………

State of Nature………..Probability…………….State Dependent Return A………….State Dependent Return B Recession……………………..70%................................-0.08………………………………………………-0.04 Expansion.....................30%.................................0.28……………………………………………….0.16 What comes closest to the variance of Stock A and the standard deviation of Stock B? a. Variance of Stock A = .0115, Standard deviation of Stock B = .0917 b. Variance of Stock A = .0272, Standard deviation of Stock B = .1033 c. Variance of Stock A = .0000, Standard deviation of Stock B = .0000 d. Variance of Stock A = .0115, Standard deviation of Stock...

State of Nature………..Probability…………….State Dependent Return A………….State Dependent Return B Recession……………………..70%................................-0.08 ………………………………………………-0.04 Expansion.....................30%.................................0.28………………………

State of Nature………..Probability…………….State Dependent Return A………….State Dependent Return B Recession……………………..70%................................-0.08 ………………………………………………-0.04 Expansion.....................30%.................................0.28……………………………………………….0.16 What comes closest to the covariance between Stock A and Stock B? a. .0028 b. .1170 c. -.0028 d. .0000 e. .0151

Q#5) a) A Dollar Today Is Worth More Than A Dollar Tomorrow. Elucidate b) Why is...

Q#5) a) A Dollar Today Is Worth More Than A Dollar Tomorrow. Elucidate b) Why is Present Value considered an Opportunity Cost? c) Are these mutually exclusive or independent projects? i) Deciding between repairing a machine or replacing it and ii) Deciding which market to enter next.

State of Economy Probability of State Return on Asset A in State Return on Asset B...

State of Economy Probability of State Return on Asset A in State Return on Asset B in State Return on Asset C in State Boom 0.35 0.04 0.21 0.3 Normal 0.5 0.04 0.08 0.2 Recession 0.15 0.04 -0.01 -0.26 a. What is the expected return of each asset? b. What is the variance of each asset? c. What is the standard deviation of each asset?

State of economy Probability Estimated Return (Fund A) Estimated Return (Fund B) Great 30% 10% 25%...

State of economy Probability Estimated Return (Fund A) Estimated Return (Fund B) Great 30% 10% 25% Average 30% 15% 11% Poor 40% 20% 15% If you invest $2,000 in Fund A and $8,000 in Fund B, Calculate the following: A.Portfolio’s Standard Deviation B. Construct the complete covariance and correlation matrixes for A&B C. Find the minimum variance portfolio using solver and report its variance, standard Deviation and expected return

Consider the following probability distribution for stocks A and B: State Probability Return on A Return...

Consider the following probability distribution for stocks A and B: State Probability Return on A Return on B 1 .15 8% 8% 2 .2 13% 7% 3 .15 12% 6% 4 .3 14% 9% 5 .2 16% 11% If you invest 35% of your portfolio in stock A, and the rest (65%) in stock B, what would be your portfolio's standard deviation? Please enter your answer in percent rounded to the nearest basis point.