Consider the following information: State of Probability of Economy State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .15 .350 .450 .330 Good .45 .120 .100 .170 Poor Bust .35 .05 .010 -.110 .020 -.050 -.250 -.090 a. Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16 b. What is the variance of this portfolio? Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161. c. What is the standard deviation of this portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16 a. Expected return b. Variance c. Standard deviation % %
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- Consider the case of two financial assets and three market conditions (states). The tablebelow gives the respective probability for each market condition and the return of each assetin each one of them. Market Conditions State Recession Normal Expansion Probability of state 30% 40% 30% Return of asset A -30% 20% 55% Return of asset B -10% 70% 0% Consider the portfolio with 50% investment in each of the two assets above. Calculatethe expected return and the standard deviation of the portfolio.Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow.% Return on T-Bills, Stocks and MarketIndexState of the Economy Probability TBills Phillips PayupRubbermadeMarketIndexRecession 0.2 7 -22 28 10 -13Below Average 0.1 7 -2 14.7 -10 1Average 0.3 7 20 0 7 15Above Average 0.3 7 35 -10 45 29Boom 0.1 7 50 -20 30 43MeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Each line item is worth 2 marksQuestion 2 Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and…Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow.% Return on T-Bills, Stocks and MarketIndexState of the Economy Probability TBills Phillips PayupRubbermadeMarketIndexRecession 0.2 7 -22 28 10 -13Below Average 0.1 7 -2 14.7 -10 1Average 0.3 7 20 0 7 15Above Average 0.3 7 35 -10 45 29Boom 0.1 7 50 -20 30 43MeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Question 2 Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an…
- Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .Using the table below, calculate the Standard Deviation of the portfolio: Demand for Company Products Probability of this Demand Occurring Rate of Return if this demand Occurs (k) Weak 0.15 -30% Below average 0.25 -15% Average 0.25 10% Above Average 0.20 25% Strong 0.15 45%Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market IndexState of the Economy Probability TBills Phillips Payup Rubbermade Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35…
- Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index State of the Economy Probability T- Phillips Pay- Rubber- Market Bills up made Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29…EXAMPLE: PORTFOLIO VARIANCE• Consider the following information on returnsand probabilities:▪ Invest 50% of your money in Asset A State Probability A B PortfolioBoom .4 30% -5% 12.5%Bust .6 -10% 25% 7.5%• What are the expected return and standarddeviation for each asset?• What are the expected return and standarddeviation for the portfolio?The following table provides information relating to Omega Ltd, as well as the market portfolio. The risk-free rate of return is 3.4% . Asset Excess Return Variance Beta Omega 12% 0.021904 1.4 M 8.1% 0.010201 1 What is Omega's M2 value? a. 7.41% b. 11.59% c. 8.99% d. 9.27% What is Omega's Sharpe Ratio? a. 0.061 b. 0.811 c. 0.086 d. 0.581 please explain the calculation step by step
- Use the following information to calculate the expected return and standard deviation of a portfolio that is 40 percent invested in Kuipers and 60 percent invested in SuCo:Kuipers SuCoExpected return, E(R) 30% 26%Standard deviation, F 65 45Correlation 30Assuming the below annual rates of return: Annual Rates of Return: Wamart - 12.36% Coca Cola - 25.51% Pfizer - 14% CVS - 32.99% Berkshire Hathaway - 29.66% Choose different values within the range of the standard deviation of the portfolio, and for each chosen value, locate the corresponding point on the efficient frontier by finding the weights that maximize the expected rate of return of the portfolio.Using the following information determine the expected rate of return for a risky asset using CAPM, consider the following example stocks assuming that you have already computed their betas Stocks Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that you expect the economy RFR to be 6% (0.06) The expected return on the market portfolio (E(Rm)) to be 8% (0.08) A market risk premium of (0.04). Question: What would be the SML required rate of return for the following stocks. A, B,C,D and E