Question
In: Finance
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 basis to form portfolio Green Wave. Consider Portfolio Green Wave to be the market portfolio. Based on the information above, calculate the following: Please use the specified units. To help you out, the standard deviation of Green is 5.05569% and Green’s covariance with portfolio Green Wave is .00207. Be certain to show your work and carry answer to 3 decimal places for B and G; and 6 decimal places for C and D.
- Expected return of wave (percent)?
- Standard Deviation of wave (percent)?
- Covariance between Green and Wave (decimal)?
- Correlation Coefficient between Green and Wave (decimal)?
- Expected return of portfolio Green Wave (percent)?
- Standard Deviation of portfolio Green Wave (percent)?
- Beta of Green (decimal)?
Solutions
Expert Solution
Expected Return of Assets
Where,
P = probability of states
R = Return in States
Variance of Assets
Standard deviation of Assets
Covariance of two assets
Return of portfolio two assets
Where,
W = weight
Standard deviation of Portfolio
Beta of an Assets
where,
m = market.
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -
Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.
jeff jeffy answered 1 year agoRelated Solutions
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2. The following table shows that the economy next year has
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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...
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State
Probability
Stock X
Stock Y
Stock Z
Above Average
10%
38.4%
28.0%
43.8%
Average
45%
15.1%
9.0%
12.0%
Below Average
30%
-2.0%
-4.0%
-7.0%
Recession
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-12.1%
-6.0%
-15.7%
Weight
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30%
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Probability
Stock X
Stock Y
Stock Z
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27.1%
43.2%
Average
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16.7%
5.5%
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-2.5%
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35
25
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55
22
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Return on Security 3
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.148
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.15
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3
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