Question
In: Finance
In one year the economy could be in one of three possible states: bust, normal, or...
- 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
jeff jeffy answered 1 year agoRelated 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:  
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
ADVERTISEMENT
Latest Questions
- This is all one question, thank you so much in advance! You must evaluate a proposal...
- X Company is considering the purchase of a new processor that costs $200,000. Shipping and setup...
- There are a large number of tasks involved in information technology and programming, and many of...
- Using one quantitative and one qualitative health policy research method described in this chapter, design a...
- What is the Rawls' solution to the age-old question of social (economic / distributive) justice?...
- St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage...
- The following information is available for Robstown Corporation for 20Y8: Inventories January 1 December 31 Materials...
ADVERTISEMENT