Homework SourseQ1 There is a 4150 probability of a below average economy an
| Q1) There is a 41.50% probability of a below average economy and a 58.50% probability of an average economy. If there is a below average economy stocks A and B will have returns of -1.70% and 4.40%, respectively. If there is an average economy stocks A and B will have returns of 13.20% and 0.20%, respectively. Compute the: a) Expected Return for Stock A (0.75 points): |
| b) Expected Return for Stock B (0.75 points): |
| c) Standard Deviation for Stock A (0.75 points): |
| d) Standard Deviation for Stock B (0.75 points): |
| Q2) There is a 34.50% probability of an average economy and a 65.50% probability of an above average economy. You invest 10.50% of your money in Stock S and 89.50% of your money in Stock T. In an average economy the expected returns for Stock S and Stock T are 13.20% and 12.80%, respectively. In an above average economy the the expected returns for Stock S and T are 29.40% and 38.30%, respectively. What is the expected return for this two stock portfolio? (2 points) |
| Q3) You are invested 26.20% in growth stocks with a beta of 1.77, 26.70% in value stocks with a beta of 0.74, and 47.10% in the market portfolio. What is the beta of your portfolio? (1 point) |
| Q4) An analyst gathered the following information for a stock and market parameters: stock beta = 0.85; expected return on the Market = 9.50%; expected return on T-bills = 1.80%; current stock Price = $9.01; expected stock price in one year = $11.04; expected dividend payment next year = $1.13. Calculate the a) Required return for this stock (1 point): |
| b) Expected return for this stock (1 point): |
| Q5) The market risk premium for next period is 5.00% and the risk-free rate is 1.50%. Stock Z has a beta of 1.40 and an expected return of 10.00%. What is the: a) Market\'s reward-to-risk ratio? (1 point): |
| b) Stock Z\'s reward-to-risk ratio (1 point): |
| Q1) There is a 41.50% probability of a below average economy and a 58.50% probability of an average economy. If there is a below average economy stocks A and B will have returns of -1.70% and 4.40%, respectively. If there is an average economy stocks A and B will have returns of 13.20% and 0.20%, respectively. Compute the: a) Expected Return for Stock A (0.75 points): |
| b) Expected Return for Stock B (0.75 points): |
| c) Standard Deviation for Stock A (0.75 points): |
| d) Standard Deviation for Stock B (0.75 points): |
| Q2) There is a 34.50% probability of an average economy and a 65.50% probability of an above average economy. You invest 10.50% of your money in Stock S and 89.50% of your money in Stock T. In an average economy the expected returns for Stock S and Stock T are 13.20% and 12.80%, respectively. In an above average economy the the expected returns for Stock S and T are 29.40% and 38.30%, respectively. What is the expected return for this two stock portfolio? (2 points) |
| Q3) You are invested 26.20% in growth stocks with a beta of 1.77, 26.70% in value stocks with a beta of 0.74, and 47.10% in the market portfolio. What is the beta of your portfolio? (1 point) |
| Q4) An analyst gathered the following information for a stock and market parameters: stock beta = 0.85; expected return on the Market = 9.50%; expected return on T-bills = 1.80%; current stock Price = $9.01; expected stock price in one year = $11.04; expected dividend payment next year = $1.13. Calculate the a) Required return for this stock (1 point): |
| b) Expected return for this stock (1 point): |
| Q5) The market risk premium for next period is 5.00% and the risk-free rate is 1.50%. Stock Z has a beta of 1.40 and an expected return of 10.00%. What is the: a) Market\'s reward-to-risk ratio? (1 point): |
| b) Stock Z\'s reward-to-risk ratio (1 point): |
Solution
Answer to Question 1:
Stock A:
Expected Return = 41.50% * (-1.70%) + 58.50% * 13.20%
Expected Return = 7.02%
Variance = 41.50% * (-0.0170 - 0.0702)^2 + 58.50% * (0.1320 - 0.0702)^2
Variance = 0.00539
Standard Deviation = (0.00539)^(1/2)
Standard Deviation = 0.0734
Standard Deviation = 7.34%
Stock B:
Expected Return = 41.50% * 4.40% + 58.50% * 0.20%
Expected Return = 1.94%
Variance = 41.50% * (0.044 - 0.0194)^2 + 58.50% * (0.002 - 0.0194)^2
Variance = 0.000428
Standard Deviation = (0.000428)^(1/2)
Standard Deviation = 0.0207
Standard Deviation = 2.07%
Answer to Question 2:
Average Economy:
Expected Return = 10.50% * 13.20% + 89.50% * 12.80%
Expected Return = 12.84%
Above Average Economy:
Expected Return = 10.50% * 29.40% + 89.50% * 38.30%
Expected Return = 37.37%
Expected Return for Portfolio = 34.50% * 12.84% + 65.50% * 37.37%
Expected Return for Portfolio = 28.91%
