Question

In: Finance

In one year the economy could be in one of three possible states: bust, normal, or...

  1. In one year the economy could be in one of three possible states: bust, normal, or boom with corresponding probabilities of 0.25, 0.5 and 0.25. The returns on a common stock A and the market portfolio M conditional on the state of the economy are presented in the table below. Assuming CAPM holds in the economy, calculate the market risk premium over the period.

Probability

Stock A

Market Portfolio

Bust

0.25

−5%

3%

Normal

0.50

10%

8%

Boom

0.25

25%

13%

Solutions

Expert Solution

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

2. The following table shows that the economy next year has three possible states: Good ,...
2. The following table shows that the economy next year has three possible states: Good , Average and Poor. It also shows the correponding probability of each states. The column of stock A shows the investment rate of return (%) for stock A; and the column of Stock B shows the invesment rate of return for stock B. Return (%) State Probability Stock A Stock B Good 0.4 15 8 Average 0.5 9 10 Poor 0.1 6 12 a) Calculate...
Assume that there are three possible states of the economy: poor, moderate and booming. A firm...
Assume that there are three possible states of the economy: poor, moderate and booming. A firm expects to have $468,000 in sales in a poor economy, $694,000 in a moderate economy, and $915,000 in a booming economy. Suppose the profit margin, for this firm, in a poor economy is 5.6 percent, 11.5 in a moderate economy and 16.5 percent in booming economy. If the chance of a booming economy is 25% and the chance of a poor economy is 15%,...
Assume that there are three possible states of the economy: poor, moderate and booming. XYZ Corp...
Assume that there are three possible states of the economy: poor, moderate and booming. XYZ Corp expects to have $350,000 in sales in a poor economy, $500,000 in a moderate economy, and $900,000 in a booming economy. If the chances of a booming economy and poor economy are 10% each, what is the expected amount of sales for XYZ? A. $500,000B. $512,500C. $525,000D. $621,000E. $805,0008. Assume a fair coin and consider the following bet: heads I pay you two dollars,...
4. Assume there are three possible future states for the economy (Boom, Stagnant, and Recession) with...
4. Assume there are three possible future states for the economy (Boom, Stagnant, and Recession) with associated probabilities of 20%, 45%, nd 35%. For each future stae of the economy, a security pays either $40.00 or $20.00 with equal probability (i.e., a 50% chance of either payoff occuring). a. What is the expected future cash flow for any given future state of the economy? b. What is the expected future cash flow for the security? c. Further assuming the future...
Suppose an economy has three states: boom, normal, and recession. Assume that the probability of a...
Suppose an economy has three states: boom, normal, and recession. Assume that the probability of a boom state is 0.2, a normal state is 0.5, and a recession state is 0.3. And there are three stocks in this economy, called Alpha, Beta, and Gamma respectively. The return performance of these stocks has been summarized by the following table: Alpha Beta Gamma boom 15% 28% 1% normal 6% 12% 3% recession -12% -30% 20% (Please show your intermediate processes, instead of...
Suppose an economy has three states: boom, normal, and recession. Assume that the probability of a...
Suppose an economy has three states: boom, normal, and recession. Assume that the probability of a boom state is 0.2, a normal state is 0.5, and a recession state is 0.3. And there are three stocks in this economy, called Alpha, Beta, and Gamma respectively. The return performance of these stocks has been summarized by the following table: Alpha Beta Gamma boom 15% 28% 1% normal 6% 12% 3% recession -12% -30% 20% (Please show your intermediate processes, instead of...
1. Consider the following information on three stocks in four possible future states of the economy:                         &nbsp
1. Consider the following information on three stocks in four possible future states of the economy:                                                                                                (6 marks total) Rate of return if state occurs State of economy Probability of state of economy Stock A Stock B Stock C Boom 0.4 0.35 0.45 0.38 Good 0.3 0.15 0.20 0.12 Poor 0.2 0.05 -0.10 -0.05 Bust 0.1 0.00 -0.30 -0.10 a.   Your portfolio is invested 50% in A, 20% in B, and 30% in C. What is the expected return...
II. Arbitrage Suppose the economy can be in one of the following three states: (i) Boom...
II. Arbitrage Suppose the economy can be in one of the following three states: (i) Boom or “good” state, (ii) Neutral state, and (iii) Recession or “bad” state. Each state can occur with an equal probability. There are three securities available in the economy: A, B, C. The net payoffs of these securities are as follows: • Security A: at the end of the year, the security is expected to yield a net payoff of $30 in the good state,...
There are three different potential states of the economy next year. The chart below shows you...
There are three different potential states of the economy next year. The chart below shows you the returns for stocks Green and Wave under each potential economic situation, along with the probability of each situation occurring (note that the probabilities are not all the same). These are the only two stocks in the economy. Economic State Probability Green Wave Boom 0.1 13% 7% Average 0.7 3% 6% Bust 0.2 -6% -3% Green and Wave can be combined on a 50/50...
Security Returns if State Occurs State of Economy Probability of State of Economy Roll Ross Bust...
Security Returns if State Occurs State of Economy Probability of State of Economy Roll Ross Bust 0.40 −10 % 21 % Boom 0.60 28 8 Calculate the expected return on a portfolio of 55 percent Roll and 45 percent Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT