Consider the following information about the various states of economy and the returnsof various investment alternatives for each scenario. Answer the questions that follow.State of the EconomyRecessionBelow AverageAverageAbove AverageBoomMeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Probability0.20.10.30.30.1Question 2% Return on T-Bills, Stocks and MarketIndexPay- Rubber- MarketmadeIndex10-13T-Bills77777Phillips-22-2203550up2814.70-10-20Question 1Fill the parts in the above table that are shaded in yellow. You will notice that there arenine line items.Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML)-10745301152943b) Superimpose the CAPM's required return on the SMLc) Indicate which investments will plot on, above and below the SML?d) If an investment's expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph.Question 3From the information generated in the previous two questions;a) Identify two investment alternatives that can be combined in a portfolio. Assume a5050 investment allocation in each investment alternativeb) Compute the expected return of the portfolio thus formedc) Compute the portfolio's beta. Is the portfolio aggressive or defensive?

Formula for calculating Mean, Standard deviation and coefficient of variation with probability is as…

Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index Pay- Rubber- Market made Index 10 -13 1 15 29 43 T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 up 28 14.7 -10 0 7 -10 -20 45 30

Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index Pay- Rubber- Market made Index 10 -13 1 15 29 43 T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 up 28 14.7 -10 0 7 -10 -20 45 30

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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