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[Q8-Q10] The following table shows four economic scenarios for next year with their respective probabilities. Also...

[Q8-Q10] The following table shows four economic scenarios for next year with their respective probabilities. Also included in the table are the returns on stock A and returns on the market under the four scenarios.

Scenario Probability RA RMarket
Boom 0.25 0.45 0.3
Normal 0.50 0.15 0.1
Recession 0.20 -0.075 -0.05
Disaster 0.05 -0.75 -0.5

QUESTION 8

  1. Suppose that stock B has a beta of 3 and a volatility (i.e. return standard deviation) of 0.35. Between stock A and stock B, which stock has more systematic risk? Which stock has more total risk?

    A.

    Stock B; Stock B
    B.

    Stock B; Stock A
    C.

    Stock A; Stock B
    D.

    Stock A; Stock A

QUESTION 9

  1. You hold $20,000 of stock A and $40,000 of stock B. What is the beta of your portfolio?

    A.

    1.5
    B.

    -1
    C.

    0
    D.

    2.5

QUESTION 10

  1. What is the expected return on your portfolio? Assume that the CAPM holds and the risk-free rate is 0.03.

    A.

    0.12
    B.

    0.18
    C.

    0
    D.

    0.03

Please help and show work.

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 1 year ago
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