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?

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

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

jeff jeffy answered 1 year ago

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