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In: Finance

The table below presents the state-based returns of securities A and B, the risk-free security and...

  1. The table below presents the state-based returns of securities A and B, the risk-free security and the market portfolio, where p is the probability of each state. Use the information therein to answer parts a and b.

State

p

Security A

Security B

Risk-free security

Market portfolio

Recession

0.5

-4%

44%

2%

-6%

Normal

0.4

10%

-10%

2%

20%

Boom

0.1

40%

-30%

2%

30%
  1. Calculate the expected return and its standard deviation of securities A and B.
  2. Suppose you borrow $30,000 at the risk-free rate and along with the $60,000 you have, you invest $15,000 in security A and $75,000 in security B. Calculate the expected return, its standard deviation and the CAPM-implied beta of this portfolio.

Please show all work.

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 2 years ago
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