Question
In: Finance
Below are the expected returns from both stocks based on the probability of economic conditions. It...
Below are the expected returns from both stocks based on the probability of economic conditions. It is desired to create a portfolio from two stocks. It is decided to invest 60% in stock A and 40% in stock B.
|
Stock A |
||
|
State (i) |
p(i) |
E(R) |
|
Recession |
0.50 |
-40% |
|
Neutral |
0.40 |
15% |
|
Boom |
0.10 |
30% |
|
1.00 |
||
|
Stock B |
||
|
State (i) |
p(i) |
E(R) |
|
Recession |
0.5 |
30% |
|
Neutral |
0.40 |
15% |
|
Boom |
0.1 |
-10% |
|
1.00 |
||
- Compute the expected return and standard deviation of each stock? (5 points)
- Find the covariance of stocks A and B? (5 points)
- Find the correlation coefficient between stocks A and B? (5 points)
- Find the expected return and standard deviation of this portfolio? (10 points)
- If you were a portfolio manager, what type of investors do you recommend this portfolio and why? (5 points)
Solutions
Expert Solution
e) If i were a portfolio manager I would recommend this portfolio to an investor who is risk seeking or risk neutral because there is probability of high return but that comes with high risk.
jeff jeffy answered 2 years agoRelated Solutions
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(8%)
(21%)
0.2
6
0
0.4
10
24
0.2
24
30
0.1
36
49
Calculate the expected rate of return, rB, for Stock
B (rA = 12.80%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.87%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
(14%)
(35%)
0.2
4
0
0.3
12
20
0.2
18
29
0.1
30
42
Calculate the expected rate of return, rB, for Stock
B (rA = 8.20%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 25.07%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
(11%)
(27%)
0.2
3
0
0.3
11
21
0.2
22
27
0.1
40
41
A.Calculate the expected rate of return, rB, for
Stock B (rA = 10.10%.) Do not round intermediate
calculations. Round your answer to two decimal places.
%
B.Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 22.00%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(14%)
(29%)
0.2
3
0
0.4
13
23
0.2
24
27
0.1
35
37
Calculate the expected rate of return, rB, for Stock
B (rA = 12.70%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.47%.) Do not round
intermediate calculations. Round your...
Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability...
Expected returns
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
-10%
-39%
0.2
6
0
0.3
11
21
0.2
20
27
0.1
36
44
Calculate the expected rate of return, rB, for Stock
B (rA = 10.10%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 26.59%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(10%)
(35%)
0.2
3
0
0.3
11
19
0.3
19
27
0.1
32
47
Calculate the expected rate of return, rB, for Stock
B (rA = 11.80%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 21.10%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(7%)
(26%)
0.2
5
0
0.3
10
24
0.3
22
28
0.1
33
40
Calculate the expected rate of return, rB, for Stock
B (rA = 13.20%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.62%.) Do not round
intermediate calculations. Round your...
Stocks X and Y have the following probability distributions of expected returns for four possible economic...
Stocks X and Y have the following probability distributions of
expected returns for four possible economic states.
Economy State
Probability
Stock X
Stock Y
1
0.1
-8%
5%
2
0.4
-10%
8%
3
0.4
9%
-2%
4
0.1
14%
-10%
e. Calculate the two-stock portfolio’s standard deviation.
f. Calculate the two-stock portfolio’s beta.
g. If the overall market return is 8% and the risk-free rate is
1%, what is the two-stock portfolio’s required return?
h. How can you reallocate t
Stocks X and Y have the following probability distributions of expected returns for four possible economic...
Stocks X and Y have the following probability distributions of
expected returns for four possible economic states.
Economy State
Probability
Stock X
Stock Y
1
0.1
-8%
5%
2
0.4
-10%
8%
3
0.4
9%
-2%
4
0.1
14%
-10%
Suppose you construct a two-stock portfolio that has $3 million
invested in Stock X and $1 million invested in Stock Y. The beta of
Stock X is 20% higher than the beta of overall stock market. Stock
Y’s beta is...
8.06 EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns:...
8.06
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(12%)
(20%)
0.2
6
0
0.3
15
19
0.3
24
30
0.1
34
48
Calculate the expected rate of return, rB, for Stock
B (rA = 15.10%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.51%.) Do not round
intermediate calculations. Round...
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