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c) What are the beta of the two stocks? d) Based on your calculation in b and c, which stock is risker in terms of total risk, which stock is riskier in terms of systematical risk? e) If you invest 50% in stock A and 50% in stock B, what is the expected return and standard deviation of your portfolio?

c) What are the beta of the two stocks? d) Based on your calculation in b and c, which stock is risker in terms of total risk, which stock is riskier in terms of systematical risk? e) If you invest 50% in stock A and 50% in stock B, what is the expected return and standard deviation of your portfolio?

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 26P
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Question 7 You expect that the likelihood of economic recession and boom is 20% and 80% respectively. Based on this basic forecast, you further estimate the returns for two stocks when the economy state is either recession and boom. Your estimation is as follow: Probability of State of Economy State of Economy Returns if State Occurs Stock A Stock B Recession Boom 0.20 -0.30 -0.01 0.80 0.15 0.10 The market risk premium is 4%, and the risk-free rate is 1.5%. a) What are the expected returns of the two stocks? b) What are the standard deviations of the two stocks? c) What are the beta of the two stocks? d) Based on your calculation in b and c, which stock is risker in terms of total risk, which stock is riskier in terms of systematical risk? e) If you invest 50% in stock A and 50% in stock B, what is the expected return and standard deviation of your portfolio?
Transcribed Image Text:Question 7 You expect that the likelihood of economic recession and boom is 20% and 80% respectively. Based on this basic forecast, you further estimate the returns for two stocks when the economy state is either recession and boom. Your estimation is as follow: Probability of State of Economy State of Economy Returns if State Occurs Stock A Stock B Recession Boom 0.20 -0.30 -0.01 0.80 0.15 0.10 The market risk premium is 4%, and the risk-free rate is 1.5%. a) What are the expected returns of the two stocks? b) What are the standard deviations of the two stocks? c) What are the beta of the two stocks? d) Based on your calculation in b and c, which stock is risker in terms of total risk, which stock is riskier in terms of systematical risk? e) If you invest 50% in stock A and 50% in stock B, what is the expected return and standard deviation of your portfolio?
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