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A portfolio contains two stocks: Luckin Stock and Gold Stock. Luckin Stock accounts for 70% of the portfolio and Gold Stock accounts for the rest 30%. There are three scenarios for the economy with the same probability. And rate of return for each stock in each scenario is presented below: Scenario Recession Normal Boom Probability 1/3< 1/3 1/3 Rate of return (%)< Luckin Stock -18% +12% +24%< Gold Stock +15% +3% -15% a) Please calculate the average rate of return for the portfolio.< b) Please calculate the total risk (standard deviation) for the portfolio.< c) If the average rate of return for the portfolio that you have calculated above is the nominal average rate of return, and the inflation rate is 3.5%, then what is the real average rate of return for the portfolio?< d) If the expected market's rate of return is 12%, the Treasure bill's rate of return is 3%, the beta for Luckin Stock is 0.8 and the beta for Gold Stock is 1.2, then what is the expected rate of return for the portfolio using CAPM?

A portfolio contains two stocks: Luckin Stock and Gold Stock. Luckin Stock accounts for 70% of the portfolio and Gold Stock accounts for the rest 30%. There are three scenarios for the economy with the same probability. And rate of return for each stock in each scenario is presented below: Scenario Recession Normal Boom Probability 1/3< 1/3 1/3 Rate of return (%)< Luckin Stock -18% +12% +24%< Gold Stock +15% +3% -15% a) Please calculate the average rate of return for the portfolio.< b) Please calculate the total risk (standard deviation) for the portfolio.< c) If the average rate of return for the portfolio that you have calculated above is the nominal average rate of return, and the inflation rate is 3.5%, then what is the real average rate of return for the portfolio?< d) If the expected market's rate of return is 12%, the Treasure bill's rate of return is 3%, the beta for Luckin Stock is 0.8 and the beta for Gold Stock is 1.2, then what is the expected rate of return for the portfolio using CAPM?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 25P
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A portfolio contains two stocks: Luckin Stock and Gold Stock. Luckin Stock accounts for 70% of the portfolio and Gold Stock accounts for the rest 30%. There are three scenarios for the economy with the same probability. And rate of return for each stock in each scenario is presented below: Scenario Recession Normal Boom Probability 1/3< 1/3 1/3< Rate of return (%)< Luckin Stock -18% +12% +24%< Gold Stock +15% +3% -15% a) Please calculate the average rate of return for the portfolio.< b) Please calculate the total risk (standard deviation) for the portfolio. c) If the average rate of return for the portfolio that you have calculated above is the nominal average rate of return, and the inflation rate is 3.5%, then what is the real average rate of return for the portfolio? d) If the expected market's rate of return is 12%, the Treasure bill's rate of return is 3%,< the beta for Luckin Stock is 0.8 and the beta for Gold Stock is 1.2, then what is the expected rate of return for the portfolio using CAPM? e) According to Security Market Line, should we choose this portfolio?
Transcribed Image Text:A portfolio contains two stocks: Luckin Stock and Gold Stock. Luckin Stock accounts for 70% of the portfolio and Gold Stock accounts for the rest 30%. There are three scenarios for the economy with the same probability. And rate of return for each stock in each scenario is presented below: Scenario Recession Normal Boom Probability 1/3< 1/3 1/3< Rate of return (%)< Luckin Stock -18% +12% +24%< Gold Stock +15% +3% -15% a) Please calculate the average rate of return for the portfolio.< b) Please calculate the total risk (standard deviation) for the portfolio. c) If the average rate of return for the portfolio that you have calculated above is the nominal average rate of return, and the inflation rate is 3.5%, then what is the real average rate of return for the portfolio? d) If the expected market's rate of return is 12%, the Treasure bill's rate of return is 3%,< the beta for Luckin Stock is 0.8 and the beta for Gold Stock is 1.2, then what is the expected rate of return for the portfolio using CAPM? e) According to Security Market Line, should we choose this portfolio?
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