Question

In: Finance

Stock A is expected to return 12 percent in a normal economy and lose 7 percent...

Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a recession. Stock B is

expected to return 8 percent in a normal economy and 2 percent in a recession. The probability of the economy

being normal is 80 percent and the probability of a recession is 20 percent. What is the covariance of these two

securities?

Please SHOW Work Not JUST ExCell Thank You

Solutions

Expert Solution

Stock A

State of Economy Probability (P) Return(%) Probability*Return Deviation form expected return (D1)
Recession 0.2 -7 -1.40 -15.20
Normal 0.8 12 9.60 3.80

Expected return = Probability*Return

= -1.4+9.6

= 8.20%

*Deviation form expected return = Rate of return -  expected return

Stock B

State of Economy Probability (P) Return(%) Probability*Return Deviation form expected return (D2)
Recession 0.2 2 0.40 -4.80
Normal 0.8 8 6.40 1.20

Expected return = Probability*Return

= .4+6.4

= 6.80%

*Deviation form expected return = Rate of return -  expected return

Probability (P) Deviation (D1) Deviation (D2) PD1D2
0.2 -15.20 -4.80 14.59
0.8 3.80 1.20 3.65

Covariance = PD1D2

= 14.59+3.65

= 18.24

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

RTF stock is expected to return 11 percent in a normal economy and lose 15 percent...
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in recession. The probability of a recession is 33 percent while the probability of a booming economy is zero percent. What is the variance of the returns on RTF stock?
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent...
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in recession. The probability of a recession is 33 percent while the probability of a booming economy is zero percent. What is the variance of the returns on RTF stock?
If the economy is normal, Charleston Freight stock is expected to return 16.5 percent.
If the economy is normal, Charleston Freight stock is expected to return 16.5 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock? A. 0.010346 B. 0.012634 C. 0.013420 D. 0.013927 E. 0.014315
Stock S is expected to return 12% in a boom and 6% in a normal economy....
Stock S is expected to return 12% in a boom and 6% in a normal economy. Stock T is expected to return 20% in a boom and 4% in a normal economy. There is a probability of 40% that the economy will boom; otherwise, it will be normal. What is the portfolio variance and standard deviation if 30% of the portfolio is invested in Stock S and 70% is invested in Stock T? Briefly discuss what this means to the...
Malone Imports stock should return 12 percent in a boom, 10 percent in a normal economy,...
Malone Imports stock should return 12 percent in a boom, 10 percent in a normal economy, and 2 percent in a recession. The probabilities of a boom, normal economy, and recession are 5 percent, 85 percent, and 10 percent, respectively. What is the variance of the returns on this stock? Please explain your answer.
Expected return of stock Alpha is 8 percent and of stock Beta is 12 percent. The...
Expected return of stock Alpha is 8 percent and of stock Beta is 12 percent. The standard deviation of the stocks are 13 percent and 18 percent respectively. The correlation between these two stocks is 0.4. If the portfolio manager has decided to invest all the funds that he holds in some proportion in these two assets. The expected return of the portfolio based on this proportion is 11.5%. What are the weights in each of the stocks? What is...
Stock S is expected to return 12 percent in a boom and 6 percent in a...
Stock S is expected to return 12 percent in a boom and 6 percent in a normal economy. Stock T is expected to return 20 percent in a boom and 4 percent in a normal economy. There is a 40 percent probability that the economy will boom; otherwise, it will be normal. What is the portfolio variance if 30 percent of the portfolio is invested in Stock S and 70 percent is invested in Stock T? A. .002220 B. .008080 C. .006224 D....
You own stock with an overall expected return of 18.32 percent. The economy is expected to...
You own stock with an overall expected return of 18.32 percent. The economy is expected to either boom or be normal. There's a 65 percent chance the economy will boom. If the economy booms, the stock is expected to return 23 percent. What's the expected return on the stock if the economy is normal? A. 8.51% B. 9.63% C. 11.84% D. 10.25% Please show work.
7. Stock A has an expected return of 18.6 percent and a beta of 1.2. Stock...
7. Stock A has an expected return of 18.6 percent and a beta of 1.2. Stock B has an expected return of 15 percent and a beta of 0.9. Both stocks are correctly priced and lie on the Security market Line (SML). What is the reward-to-risk ratio for stock A?
Crabby Shores stock is expected to return 15.7 percent in abooming economy, 9.8 percent in...
Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. What is the expected rate of return on this stock?Multiple Choice 10.74 percent 10.61 percent 10.07 percent 9.79 percent 8.68 percent
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT