Adequate information: Price of Stock A today (P 0 ) $75 Price of Stock A in Next Year Probability Recession $64 (P 1 ) 0.20 (P R ) Normal $87 (P 2 ) 0.60 (P N ) Expanding $97 (P 3 ) 0.20 (P E ) Stock A correlation with market (? A , M ) = 0.70 Expected return on Stock B [E(R B )] = 14% Standard deviation of Stock B (σ B ) = 34% Stock B correlation with market (ρ B , M ) = 0.24 Stock B correlation with Stock A (ρ B , A ) = 0.36 Market standard deviation (σ M ) = 18% To compute: Which stock would be preferred by an investor, if the investor is risk-averse? Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

Question

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Answer 1

Question

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

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Answer 2

Question

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

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Answer 3

Question

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

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Answer 4

Question

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Expert Solution & Answer

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See solution

Answer 5

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Answer 6

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

Answer 7

Chapter 11, Problem 37QAP

a.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (?_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

To compute: Which stock would be preferred by an investor, if the investor is risk-averse?

Introduction: Systematic risk also known as non-diversifiable risk and is measured by the value of beta. The higher the value of beta, the higher the value of the systematic risk.

Answer 8

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

Answer 9

b.

Summary Introduction

Adequate information:

Price of Stock A today (P₀) $75
Price of Stock A in Next Year Probability
Recession $64 (P₁) 0.20 (P_R)
Normal $87 (P₂) 0.60 (P_N)
Expanding $97 (P₃) 0.20 (P_E)

Stock A correlation with market (ρ_A_,_M) = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market (ρ_B_,_M) = 0.24

Stock B correlation with Stock A (ρ_B_,_A) = 0.36

Market standard deviation (σ_M) = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: The expected return and standard deviation of the portfolio.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

Answer 10

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Answer 11

c.

Summary Introduction

Adequate information:

Price of Stock A today $75
Price of Stock A in Next Year Probability
Recession $64 0.2
Normal $87 0.6
Expanding $97 0.2

Stock A correlation with market = 0.70

Expected return on Stock B [E(R_B)] = 14%

Standard deviation of Stock B (σ_B) = 34%

Stock B correlation with market = 0.24

Stock B correlation with Stock A = 0.36

Market standard deviation = 18%

Weight of Stock A (W_A) = 70% or 0.70

Weight of Stock B (W_B) = 30% or 0.30

To compute: Beta of the portfolio

Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.

Answer 12

Expert Solution & Answer

Answer 13

Expert Solution & Answer

Answer 14

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Answer 15

Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQ Ch. 11 - Prob. 9CQ Ch. 11 - Prob. 10CQ

Solution Summary: The author explains that systematic risk is measured by the value of beta. The higher the beta, the greater the systematic risk.

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Chapter 11 Solutions

Price of Stock A today (P₀)	$75
	Price of Stock A in Next Year	Probability
Recession	$64 (P₁)	0.20 (P_R)
Normal	$87 (P₂)	0.60 (P_N)
Expanding	$97 (P₃)	0.20 (P_E)

Price of Stock A today	$75
	Price of Stock A in Next Year	Probability
Recession	$64	0.2
Normal	$87	0.6
Expanding	$97	0.2