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

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 1 year ago

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