Adequate information:
Probability in Bear
Probability in Normal
Probability in Bull
Expected return for Stock J in Bear
Expected return for Stock J in Normal
Expected return for Stock J in Bull
Expected return for Stock K in Bear
Expected return for Stock K in Normal
Expected return for Stock K in Bull
To compute: Expected return, standard deviation, covariance, and correlation.
Introduction: The expected return of the stocks refers to the return expected on the stocks. Standard deviation measures the deviation between the actual prices and the average price. Covariance reflects the relationship of two random variables and projects the impact of one variable whenever the other one changes. Correlation refers to the degree of fluctuation of two variables in relation to one another.
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Chapter 11 Solutions
CORPORATE FINANCE (LL+CONNECT)
- The covariance between the returns on two stock is 0.0425. The standard deviations of stocks A and B are 0.2041 and 0.2944, respectively. Calculate and interpret the correlations between the two assetsarrow_forwarda. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance betweenthe returns of A and B is 0.006. The correlation of returns between A and B is:arrow_forwardThe standard deviation of a stock’s return is a measure of its? Multiple Choice systematic risk correlation expected future return total riskarrow_forward
- Calculate the variance and standard deviation of each stockarrow_forwardWhat 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.arrow_forwardKINDLY ANSWER PART 5,6.and 7 Using the stock price data for any two companies provided below carry out the following tasks: 1.Compute, for each asset: i.Total Returns ii.Expected returns iii.standard deviation iv.Correlation Coefficient 2.Construct the variance-covariance matrix 3.Construct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 4.Reconstruct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 5.Use Solver to determine optimal risky portfolio. 6.Create hypothetical portfolios (commencing from Weight A=0 and weight B=100) 7.Calculate Expected return and Standard Deviation for all the above combinations 8.Graph the efficient frontier 9.Graph the optimal portfolio 10.Assuming that the investors prefers lower level of risk than what a portfolio of risky assets offer, introduce a risk free asset in the portfolio with a return of 3% 11.Using hypothetical weights (A= Portfolio of Risky…arrow_forward
- the variance of stock A is .004, the variance of the market .007 and the covariance between the two is .0026. what is the correlation coefficient?arrow_forwardUsing the stock price data for any two companies provided below carry out the following tasks: 1.Compute, for each asset: i.Total Returns ii.Expected returns iii.standard deviation iv.Correlation Coefficient 2.Construct the variance-covariance matrix 3.Construct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 4.Reconstruct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 5.Use Solver to determine optimal risky portfolio. 6.Create hypothetical portfolios (commencing from Weight A=0 and weight B=100) 7.Calculate Expected return and Standard Deviation for all the above combinations 8.Graph the efficient frontier 9.Graph the optimal portfolio 10.Assuming that the investors prefers lower level of risk than what a portfolio of risky assets offer, introduce a risk free asset in the portfolio with a return of 3% 11.Using hypothetical weights (A= Portfolio of Risky Assets, B= 1 Risk Free…arrow_forwardWhich of the following statements regarding standard deviation is TRUE: Group of answer choices A measure of the dispersion of a random variable The annualised volatility The square root of volatility Always expressed in %arrow_forward
- When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.arrow_forwardThe beta of a portfolio is: A. A measure of the correlation of betas of the securities in the portfolio. B. Always greater than one. C. The market value weighted average beta of the securities in the portfolio. D. The geometric average of the beta of the securities in the portfolio.arrow_forwardThe Beta coefficients of TSLA and JPM are 1.99 and 1.18 respectively. What does Beta measure and how is it interpreted? Explain the beta values of TSLA and JPM by providing a calculated example of how they relate to market returns.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningPfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
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