Chapter A6, Problem 9DQ

Hi can you help me with these two problem down below   1. Suppose you observe the following situation:   State of Economy Probability of State of Economy Return of Stock A Return of Stock B Bust .15 -.08 -.10 Normal .60 .11 .09 Boom .25 .30 .27   Calculate the expected return on each stock.   2.  Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.’s stock to change price: The government announces that inflation unexpectedly jumped by 2 percent last month. Big Widget’s quarterly earnings report, just issued, generally fell in line with analysts’ expectations. The government reports that economic growth last year was at 3 percent, which generally agreed with most economists’ forecasts. The directors of Big Widget die in a plane crash. Congress approves changes to the tax code that will decreases the top marginal corporate tax rate. The legislation had been debated…

In late 1980, the U.S. Commerce Departmentreleased new data showing inflation was 15%. At the time, the prime rate of interestwas 21%, a record high. However, many investors expected the new Reagan administrationto be more effective in controlling inflation than the Carter administration hadbeen. Moreover, many observers believed that the extremely high interest rates andgenerally tight credit, which resulted from the Federal Reserve System’s attempts tocurb the inflation rate, would lead to a recession, which, in turn, would lead to a declinein inflation and interest rates. Assume that, at the beginning of 1981, the expected inflationrate for 1981 was 13%; for 1982, 9%; for 1983, 7%; and for 1984 and thereafter, 6%.a. What was the average expected inflation rate over the 5-year period 1981–1985? (Usethe arithmetic average.) b. Over the 5-year period, what average nominal interest rate would be expected to producea 2% real risk-free return on 5-year Treasury securities? Assume MRP =…

All would indicate that hyperinflation exists, except: a. The general population regards monetary amounts in terms of relatively stable foreign currency. b. The cumulative inflation rate over three years is approaching or exceeds 100%. c. Inflation rates have exceeded interest rates in three successive years. d. The general population prefers to keep its wealth in nonmonetary assets.

What are some comments that can be made on this?   The stock market crash of 2020 is the largest index point plunge in U.S history. Starting March 9 2020, the Dow Jones Industrial Average index suffered one of three point drops. This is sufficient because stock market indexes are a measure of market sentiment. The most common stock indexes are the Dow Jones industrial average, S and P 500, and the Nasdaq stock market composite. The Dow Jones index is price averages while the s and p 500 and the nasdaq stock market composite are market capitalization weighted. When the Dow Jones drops 20.3% in a matter of days, this meant that there were negative market sentiment factors at play. At the time before this occurrence, the threat of the corona virus had investors worried. There would soon be a shutdown which would cause record unemployment and would significantly decrease purchasing power. This caused investors to move their capital into safer investments. In this case it was the bond…

In late 1980, the U.S. Commerce Department released new data showing inflation was 15%. At the time, the prime rate of interest was 21%, a record high. However, many investors expected the new Reagan administration to be more effective in controlling inflation than the Carter administration had been. Moreover, many observers believed that the extremely high interest rates and generally tight credit, which resulted from the Federal Reserve System's attempts to curb the inflation rate, would lead to a recession, which, in turn, would lead to a decline in inflation and interest rates. Assume that at the beginning of 1981, the expected inflation rate for 1981 was 12%; for 1982, 9%; for 1983, 7%; and for 1984 and thereafter, 6% Assuming a real risk-free rate of 3% and a maturity risk premium that equals 0.1 x (t)%, where t is the number of years to maturity, estimate the interest rate in January 1981 on bonds that mature in 2 years. Round your answer to two decimal places.% Assuming a real…

Gasgard is a country which is going through a historical structural change in its economy. Experts are very confident in stating that the economic situation in Gasgard will not change for the next five or ten years. Lokey, a stockbroker, gives his clients the following advice: “Avoid making any investments in Gasgard stocks (via Heimdal the national stock exchange of Gasgard), because the expected returns of stocks are believed to be below the historical average for the next five to ten years.” Is Lokey’s advice sensible? Explain.

Which one of the following statements is an example of unsystematic risk? The number of vehicles sold by a major manufacturer was less than anticipated. GDP was 0.5 percent lower than expected. The inflation rate increased by 5 percent. The value of the dollar declined against the other major currencies.

The FX forecast indicates that the value of British Pound will fall vis-à-vis the US dollar over the next three months. You are considering investing for three months in a dually listed stock on the NYSE as well as the LSE. Since it is the same stock, the risk-return profile is identical except for the fact that it is listed for trade in different jurisdictions with different currencies. Assuming you are a British citizen, where should you purchase the stock – Britain or the United States? Provide suitable arguments for your decision

Which of the following hypothetical phenomena would be either consistent with or a violation of the efficient market hypothesis? Explain briefly.a. Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year.b. Money managers who outperform the market (on a risk-adjusted basis) in one year are likely to outperform the market in the following year.c. Stock prices tend to be predictably more volatile in January than in other months.d. Stock prices of companies that announce increased earnings in January tend to outperform the market in February.