a.
Adequate information:
Price of Stock A today (P0) | $75 | |
Price of Stock A in Next Year | Probability | |
Recession | $64 (P1) | 0.20 (PR) |
Normal | $87 (P2) | 0.60 (PN) |
Expanding | $97 (P3) | 0.20 (PE) |
Stock A correlation with market (?A,M) = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market (ρB,M) = 0.24
Stock B correlation with Stock A (ρB,A) = 0.36
Market standard deviation (σM) = 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.
Adequate information:
Price of Stock A today (P0) | $75 | |
Price of Stock A in Next Year | Probability | |
Recession | $64 (P1) | 0.20 (PR) |
Normal | $87 (P2) | 0.60 (PN) |
Expanding | $97 (P3) | 0.20 (PE) |
Stock A correlation with market (ρA,M) = 0.70
Expected return on Stock B [E(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market (ρB,M) = 0.24
Stock B correlation with Stock A (ρB,A) = 0.36
Market standard deviation (σM) = 18%
Weight of Stock A (WA) = 70% or 0.70
Weight of Stock B (WB) = 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.
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(RB)] = 14%
Standard deviation of Stock B (σB) = 34%
Stock B correlation with market = 0.24
Stock B correlation with Stock A = 0.36
Market standard deviation = 18%
Weight of Stock A (WA) = 70% or 0.70
Weight of Stock B (WB) = 30% or 0.30
To compute: Beta of the portfolio
Introduction: The beta of a portfolio shows the systematic risk component of a portfolio.
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CORPORATE FINANCE - LL+CONNECT ACCESS
- Suppose that the probability that the economy will be in a recession one year from now is 0.25. If the economy is in a recession one year from now the price of XYZ common stock will be $150. If the economy is not in a recession one year from now the price of XYZ common stock will be $200. If the current price of XYZ stock is $175, what is the standard deviation of the returns of XYZ common stock over the next year? Enter your answer as a percent without the “%”. Round your final answer to two decimals.arrow_forwardConsider the following information on Stocks I and II: State of Economy Recession Normal Irrational exuberance. Probability of State) of Econony 15 .70 .15 a. Stock I beta Stock Il beta. b. Stock I standard deviation Stock Il standard deviation Rate of Return if State Occurs. Stock I Stock II 05 18 07 The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. a. Calculate the beta of each stock. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b. Calculate the standard deviation of each stock. c. More systematic nsk d. More unsystematic risk e. "Riskier stock Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskler"? -.21 .10 39 % %arrow_forwardConsider the following information: Probability of State of Economy .20 .60 .20 Economy Recession Normal Boom Rate of Return if State Occurs Stock A Stock B .035 .115 .290 a. Calculate the expected return for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. Calculate the standard deviation for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B do do do do % % % % -.40 .30 .53arrow_forward
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT