MACROECONOMICS W/CONNECT
18th Edition
ISBN: 9781307253092
Author: McConnell
Publisher: Mcgraw-Hill/Create
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Question
Chapter 17, Problem 11DQ
To determine
Relation between the beta value and expected rate of return .
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Students have asked these similar questions
Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom.
Probability of each scenario, stock and bond annual returns in that scenario are provided below.
Let's also assume that you are creating a portfolio with 65% stocks and 35% bonds.
Economy State
Severe recession
Probability
0.20
Stock Return (%) Bond Return (%)
-37
-9
Mild recession
0.30
-11
15
Normal growth
0.40
14
8
Boom
0.10
30
-5
How much is the annual standard deviation of Stock returns?
Enter your answer in the following format: 0.1234
Hint: Answer is between 0.1938 and 0.2373
1. Tanner is choosing between two investment options. He can invest $500 now and get
(guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later
today. The risk-free rate is 3.5%. Which investment should Tanner prefer?
A) $531.40 later today, since $1 today is worth more than $1 in one year.
B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he
invested.
C) Neither - both investments have a negative NPV.
D) Tanner should be indifferent between the two investments, since both are equivalent to
the same amount of cash today.
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios stocks, bonds, or commodities. Your financial adviser provides
you with the following table, which gives the probabilities of possible returns from each investment
To maximize your expected return, you should choose:
Stocks
Bonds
Probability Return Probability Return
0.15 20%
0.15 16.7%
06
10%
T
04
7.5%
0.25
8%
0.45 3.3%
OA bonds
OB stocks
OC. commodities
OD. All of the portfolios have the same expected return.
If you are risk-averse and had to choose between the stock or the bond investments, you would choose
OA the stock portfolio because there is less uncertainty over the outcome
OB. the bond portfolio because there is less uncertainty over the outcome.
OC. the stock portfolio because of greater expected return.
OD. the bond portfolio because of greater expected return.
Commodities
Probability Return
02
20%
0.2
15%
0.2
8%
02
02
5%
0%
Chapter 17 Solutions
MACROECONOMICS W/CONNECT
Ch. 17 - Prob. 1DQCh. 17 - Prob. 2DQCh. 17 - Prob. 3DQCh. 17 - Prob. 4DQCh. 17 - Prob. 5DQCh. 17 - Prob. 6DQCh. 17 - Prob. 7DQCh. 17 - Prob. 8DQCh. 17 - Prob. 9DQCh. 17 - Prob. 10DQ
Ch. 17 - Prob. 11DQCh. 17 - Prob. 12DQCh. 17 - Prob. 1RQCh. 17 - Prob. 2RQCh. 17 - Prob. 3RQCh. 17 - Prob. 4RQCh. 17 - Prob. 5RQCh. 17 - Prob. 6RQCh. 17 - Prob. 7RQCh. 17 - Prob. 8RQCh. 17 - Prob. 9RQCh. 17 - Prob. 10RQCh. 17 - Prob. 1PCh. 17 - Prob. 2PCh. 17 - Prob. 3PCh. 17 - Prob. 4PCh. 17 - Prob. 5PCh. 17 - Prob. 6P
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