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%, what is the expected amount of profits for the firm?
A. more than $77,500 but less than $83,400
B. more than $83,400 but less than $89,300
C. more than $89,300 but less than $95,200
D. more than $95,200 but less than $101,100
E. more than $101,100

You own $2,400 of Alpha Bits stock that has a beta of 1.25. You also own $3,200 of Dental Drills (beta = 0.72) and $1,400 of Omega Oils (beta = 2.04). What is the beta of your portfolio?
A. more than 1.90
B. more than 1.55 but less than 1.90
C. more than 1.20 but less than 1.55
D. more than 0.95 but less than 1.20
E. less than 0.95

Solutions

Expert Solution

Q1:

State	Sales	Profit margin	Profit = Profit margin x sales	Probability	Expected Profit = Profit x Probability
Poor	468000	0.056	468000 x 0.056 = 26208	0.15	0.15 x 26208 = 3931.2
Moderate	694000	0.115	694000 x 0.115 = 79810	1-0.15-0.25=0.6	0.60 x 79810 = 47886
Boom	915000	0.165	915000 x 0.165 = 150975	0.25	0.25 x 150975 = 37743.75
					3931.20+47886+37743.75=89560.95

As there are only 3 states so total probability is 1
if poor state has probability of 15% and boom of 25% then 1-0.15-0.25 = 0.60 or the probability of moderate state
As the expected profit = 89560.95, it is more than $89,300 but less than $95,200 so the correct option is C

Q2:

Stock	Amount	Beta	Weighted Beta = Beta x Amount
Alpha Bits	$ 2,400.00	1.25	1.25 x 2400/7000 = 0.428571429
Dental Drills	$ 3,200.00	0.72	0.72 x 3200/7000 = 0.329142857
Omega Oils	$ 1,400.00	2.04	2.04 x 1400/7000 = 0.408
Total	2400+3200+1400=$ 7,000.00		0.428571429 + 0.329142857 + 0.408 = 1.165714286

As the total of weighted beta or the portfolio beta is 1.165714286, it is more than 0.95 but less than 1.20 so the correct option is D

jeff jeffy answered 8 months ago

Next > < Previous

Related Solutions

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...

What is the standard deviation if there is a 25% chance of a poor economy and a 25% chance of a booming economy?

A company will earn 10% returns in a poor economy, 16% returns in a normal economy, and 25% returns in a booming economy. What is the standard deviation if there is a 25% chance of a poor economy and a 25% chance of a booming economy?

1. Assume the economy can either be booming or in recession. The probability of a boom...

1. Assume the economy can either be booming or in recession. The probability of a boom is 65%. If the economy is booming, a certain stock has an expected return of 20%. If the economy is in recession, the expected return of that same stock is 4%. What is the long term expected return of the stock? 2. Over the last year you observe that a certain company had a stock return of 24%, while the market had a return...

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%...

Assume that the demand for lending by financial institution increases significantly because of a booming economy...

Assume that the demand for lending by financial institution increases significantly because of a booming economy and business activities. Also, assume that the fed is not interested in intervening to support the increase in demand for lending by banks. what change do you expect to see in the direction of the short term interest rate? will it increase, decrease or stay the same? explain, briefly, with the help of a relevant diagram, the federal fund market.

Assume that the economy has just come out of a severe recession, and growth is booming....

Assume that the economy has just come out of a severe recession, and growth is booming. The labor force is growing because many unemployed people who thought they could not find a job during the recession now think they can and have started to apply for work. But, not all of these people find a job immediately. What do you think will happen to the unemployment rate this month?

Two states of nature exist for a particular situation: a good economy and a poor economy....

Two states of nature exist for a particular situation: a good economy and a poor economy. An economic study may be performed to obtain more information about which of these will actually occur in the coming year. The study may forecast either a good economy or a poor economy. Currently there is a 60% chance that the economy will be good and a 40% chance that it will be poor. In the past, when ever the economy was good, the...

1. Consider the following information on three stocks in four possible future states of the economy: &nbsp

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...

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...

Subjects