Question

In: Finance

A. A stock is expected to earn 29 percent in a boom economy and 14 percent...

A. A stock is expected to earn 29 percent in a boom economy and 14 percent in a normal economy. There is a 42 percent chance the economy will boom and a 58.0 percent chance the economy will be normal. What is the standard deviation of these returns?

B.

A portfolio consists of 35 percent Stock A, 54 percent Stock B, and 11 percent Stock C. What is the portfolio expected return given the following:

State of Economy

Probability of State of Economy

Stock A Returns

Stock B Returns

Stock C Returns

Normal

.85

27%

   20%

   48%

Recession

.15

–2    

41

–24  

C.

A portfolio is comprised of the following stocks. What is the portfolio beta?

Stock

Market Value of Shares

Beta

A

$

26,000

2.39

B

$

23,500

1.22

C

$

11,000

1.28

Solutions

Expert Solution

A. The correct answer is 7.40%

Notes:

Probability Stock Return Expected Return ( Probability * Expected Return)
Normal 0.58 0.14 0.0812
Boom 0.42 0.29 0.1218
Expected Return   0.20
Expected Return   % 20.30
Stock Probability Probable Return Deviation ( Probable Return- Expected Return) Deviation Squared Product ( Deviation Squared* Probability)
Normal 0.58 14.00 -6.30 39.69 23.02
Boom 0.42 29.00 8.70 75.69 31.79
Variance 54.81
Standard Deviation (Square root of Variance) 7.40

B. The correct answer is 24.52%

Stock A Stock B Stock C Total
State of economy Probability Stock A Probability* Return Stock B Probability* Return Stock C Probability* Return
Normal 0.85 0.27 0.2295 0.2 0.17 0.48 0.408
Recession 0.15 -0.02 -0.003 0.41 0.0615 -0.24 -0.036
Total Returns 22.65 23.15 37.2
Weights 35% 54% 11%
expected return 7.9275 12.501 4.092 24.5205

C. The correct answer is 1.73

Note :

Stock Market Value of Shares Weight ( Market value / Total Value) Beta Weight * Beta
A 26,000 0.429752066 2.39 1.027107438
B 23,500 0.388429752 1.22 0.473884298
C 11000 0.181818182 1.28 0.232727273
60500 Portfolio Beta 1.733719008

Related Solutions

Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2...
Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2 percent in a normal economy, and 12.6 percent in a recessionary economy. Each economic state is equally likely to occur. What is his expected rate of return on this stock? 9.98 percent 11.90 percent 11.01 percent 10.38 percent 10.17 percent
You recently purchased a stock that is expected to earn 11 percent in a booming economy,...
You recently purchased a stock that is expected to earn 11 percent in a booming economy, 10 percent in a normal economy and lose 5 percent in a recessionary economy. There is a 15 percent probability of a boom, a 74 percent chance of a normal economy. What is your expected rate of return on this stock?
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....
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.
BPJ stock is expected to earn 14.8 percent in a recession, 6.3 percent in a normal...
BPJ stock is expected to earn 14.8 percent in a recession, 6.3 percent in a normal economy, and lose 4.7 percent in a booming economy. The probability of a boom is 20 percent while the probability of a normal economy is 55 percent. What is the expected rate of return on this stock? A. 6.23% B. 6.72% C. 6.81% D. 7.60% E. 8.11%
State of the economy Probability Stock P Stock Q Boom .7 32% 18% Recession .3 -14%...
State of the economy Probability Stock P Stock Q Boom .7 32% 18% Recession .3 -14% -5% a. What is the expected return of Stock P? b. What is the expected return of Stock Q? c. What is the expected return of a portfolio 60 percent invested in Stock P and the remainder in Stock Q? d. What is the standard deviation of a portfolio 60 percent invested in Stock P and the remainder in Stock Q?
There is a 20 percent probability the economy will boom, 70 percent probability it will be...
There is a 20 percent probability the economy will boom, 70 percent probability it will be normal, and a 10 percent probability of a recession. Stock A will return 18 percent in a boom, 11 percent in a normal economy, and lose 10 percent in a recession. Stock B will return 9 percent in boom, 7 percent in a normal economy, and 4 percent in a recession. Stock C will return 6 percent in a boom, 9 percent in a...
There is a 20 percent probability the economy will boom; a 20 percent probability of a...
There is a 20 percent probability the economy will boom; a 20 percent probability of a recesion and otherwise, it will be normal. The Smith Company stock is expected to return 12 percent in a boom, 8 percent in a normal economy and -3 percent in a recession. The Johnson Company stock is expected to return 15 percent in a boom, 4 percent in a normal economy and -3 percent otherwise. What is the standard deviation of a portfolio that...
17. You recently purchased a stock that is expected to earn 12.6 percent in a booming...
17. You recently purchased a stock that is expected to earn 12.6 percent in a booming economy and 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is your expected rate of return on this stock? Select one: a. 5.2 percent b. 8.9 percent c. 12.6 percent d. 7.4 percent
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT