a. Based on the following information, calculate the expected return and standard deviation foreach of the following stocks. What are the covariance and correlation between the returns ofthe two stocks? Calculate the portfolio return and portfolio standard deviation if you investequally in each asset.ReturnsState of EconomyProbKRecession0.25-0.020.034Normal0.60.1380.062Boom0.150.2180.092b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and theexpected return on the market portfolio is 12 percent. Assume the capital asset pricing modelholds. What expected rate of return would a security earn if it had a .45 correlation with themarket portfolio and a standard deviation of 55 percent?c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficientwith the market of .28 and a variance of 3285. According to the capital asset pricing model,what is the expected return on Portfolio Z?

Expected return refers to the amount of returns on estimated or probability basis for the future…

Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio retum and portfolio standard deviation if you invest equally in each asset. a. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092

Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio retum and portfolio standard deviation if you invest equally in each asset. a. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 9PROB

See similar textbooks

Similar questions

Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.
What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.
Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an expected return of 18% and a standard deviation of 60%. The correlation coefficient between Stocks A and B is 0.2. What are the expected return and standard deviation of a portfolio invested 30% in Stock A and 70% in Stock B?
You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?