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state of economy probability state of econ return stock a return stock b depression .10 -30%...

state of economy probability state of econ return stock a return stock b

depression .10 -30% 0%

recession .20 -10% 5%

normal .5 20% 20%

boom .2 50% -5%

a. calculate the expected returns of stock a and stock b

b. what are the stand-alone risk of stock a and stock b  

c. calculate the coefficient of variation of stock a CVa and stock b CVb

d. Suppose the market is in equilibrium (That is, required returns equal expected returns). The required return from a market portfolio is 10% and risk-free rate is 2%. Calculate systemic risk of Stock A (βA) and Stock B (βB)

Solutions

Expert Solution

a. calculate the expected returns of stock a and stock b

A = 15%

B = 10%

b. what are the stand-alone risk of stock a and stock b  

A = 24.19%

B = 10.49%

c. calculate the coefficient of variation of stock a CVa and stock b CVb

CVa = 161.25%

CVb = 104.88%

d. Suppose the market is in equilibrium (That is, required returns equal expected returns). The required return from a market portfolio is 10% and risk-free rate is 2%. Calculate systemic risk of Stock A (βA) and Stock B (βB)

Beta of Stock A = (Expected return - Risk Free rate) / (Market Rate - Risk Free Rate)

Beta of Stock A = (15% - 2%) / (8%)

Beta of Stock A = 1.625

Beta of Stock B = (Expected return - Risk Free rate) / (Market Rate - Risk Free Rate)

Beta of Stock B = (10% - 2%) / (8%)

Beta of Stock B = 1.0

Beta means systematic risk

Please upvote if satisfied

jeff jeffy answered 1 year ago
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