Question

Based on your research, the following states of economy, probabilities of states, and returns are forecasted...

Based on your research, the following states of economy, probabilities of states, and returns are forecasted for Stock A and Stock B:
Return if State Occurs
State of Economy
Probability of state
Stock A
Stock B
Recession
0.65
-0.15
-0.2
Normal
0.3
0.13
0.14
Irrational exuberance
0.05
0.2
0.29
a. What is the expected return on Stock A?
b. What is the expected return on Stock B?
c. Your research also indicates that stock A’s beta is greater than stock B’s beta by 0.5. calculate the expected market risk premium based on the Capital Asset Pricing Model (CAPM)?
d. Given that the risk-free rate is 0.5%, what is the expected return on the market based on the CAPM? (1 mark)
e. Given that the risk-free rate is 0.5%, calculate the expected return on a portfolio that has 20% invested in Stock A, 20% invested in Stock B, and the rest invested in the risk-free asset.
f. Calculate the standard deviation of returns for the portfolio in part (e).

Please show your calculations. I need to understand it,please.

Homework Answers

Answer #1

Solution:-

A. To Calculate Expected Return of Stock A-

Expected Return is Weighted Average Return.

Expected Return = -0.15 * 0.65 + 0.13 * 0.30 + 0.20 * 0.05

Expected Return = -4.85%

B. To Calculate Expected Return of Stock B-

Expected Return is Weighted Average Return.

Expected Return = -0.20 * 0.65 + 0.14 * 0.30 + 0.29 * 0.05

Expected Return = -7.35%

C. To Calculate Expected Market Risk Premium-

Slope (Security Market Line) =

Slope (Security Market Line) =

Slope (Security Market Line) = 5%

Expected Market Risk Premium is 5%

If you have any query related to question then feel free to ask me in a comment.Thanks.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Based on your research, the following states of economy, probabilities of states, and returns are forecasted...
Based on your research, the following states of economy, probabilities of states, and returns are forecasted for Stock A and Stock B: Return if State Occurs State of Economy Probability of state Stock A Stock B Recession 0.65 -0.15 -0.2 Normal 0.3 0.13 0.14 Irrational exuberance 0.05 0.2 0.29 a. What is the expected return on Stock A? b. What is the expected return on Stock B? c. Your research also indicates that stock A’s beta is greater than stock...
Based on your research, the following states of economy, probabilities of states, and returns are forecasted...
Based on your research, the following states of economy, probabilities of states, and returns are forecasted for Stock A and Stock B:Return if State Occurs State of Economy Probability of state Stock A Stock B Recession 0.65-0.15-0.2 Normal 0.30.130.14 Irrational exuberance 0.050.20.29 a.What is the expected return on Stock A? b.What is the expected return on Stock B? c.Your research also indicates that stock A’s beta is greater than stock B’s beta by 0.5. calculate the expected market risk premium...
We know the following expected returns for stock A and the market portfolio, given different states...
We know the following expected returns for stock A and the market portfolio, given different states of the economy: State (s) Probability E(rA,s) E(rM,s) Recession 0.2 -0.02 0.02 Normal 0.5 0.13 0.05 Expansion 0.3 0.21 0.09 The risk-free rate is 0.02. Assuming the CAPM holds, what is the beta for stock A?
Consider the following information on Stocks I and II: RATE OF RETURN IF STATE OCCURS   STATE...
Consider the following information on Stocks I and II: RATE OF RETURN IF STATE OCCURS   STATE OF   ECONOMY PROBABILITY OF STATE OF ECONOMY STOCK I STOCK II   Recession 0.06                -0.35           -0.25             Normal 0.23                0.29           0.23             Irrational exuberance 0.71                0.39           0.29           The market risk premium is 12 percent, and the risk-free rate is 5.4 percent. For standard deviations: (Do not include the percent signs (%). Round your answers to 2 decimal places....
You have done your research for the following investments and your friend has provided their expectations...
You have done your research for the following investments and your friend has provided their expectations for the markets for next year. State of Economy Probability of State of Economy Stock A Stock B TSX Boom .30 30% -9% 18% Normal .40 16% 12% 10% Recession .30 -10% 20% -10% Calculate the expected return for stock A. Calculate the expected return for stock B.    Calculate the expected return for the TSX. Calculate the risk for stock A. Calculate the...
The following are possible states of the economy and the returns associated with stocks A and...
The following are possible states of the economy and the returns associated with stocks A and B in those states. State Probability Return on A Return on B Good 0.3 24% 30% Normal 0.4 36% 18% Bad 0.3 48% -6% Calculate 1) covariance 2) coefficient 3) the expected return of the portfolio consisting of A & B The weight in stock A is 60%. 4) the standard deviation of a portfolio comprised of stocks A and B. The weight in...
Answer the following question based on the information below: State of Economy Probability Stock A’s return...
Answer the following question based on the information below: State of Economy Probability Stock A’s return Stock B’s return Boom .4 15% - 30% Recession .6 5% 40% If you invest $50,000 in each of stocks A and B, what is the expected return for your portfolio? p
A stock you are looking at has generated the following annual returns: 13.2%, -11.4% and 7.2%....
A stock you are looking at has generated the following annual returns: 13.2%, -11.4% and 7.2%. What was the standard deviation of its returns? Answer in percent, rounded to two decimal places (e.g., 4.32% = 4.32). What is the CAPM required return of a portfolio with 43% invested in the market portfolio, 14% invested in risk-free assets, and the rest invested in a stock with a beta of 2.4? The risk free rate is 0.7% and the expected market risk...
Grubb, an analyst at the Oracle Consulting has forecasted next years returns for IBM stock and...
Grubb, an analyst at the Oracle Consulting has forecasted next years returns for IBM stock and the overall market under the following three plansible scenarios. State of the world Probability Return On IBM Return on Market Portfolio Long drawn war 0.1 -20% -6% Short War 0.7 10% 12% No war 0.2 30% 16% a) compute expected return, and the standard deviation the IBM stock and the market portfolio b) If the esstimated beta for the IBM is 1.2 and the...
Suppose an economy has three states: boom, normal, and recession. Assume that the probability of a...
Suppose an economy has three states: boom, normal, and recession. Assume that the probability of a boom state is 0.2, a normal state is 0.5, and a recession state is 0.3. And there are three stocks in this economy, called Alpha, Beta, and Gamma respectively. The return performance of these stocks has been summarized by the following table: Alpha Beta Gamma boom 15% 28% 1% normal 6% 12% 3% recession -12% -30% 20% (Please show your intermediate processes, instead of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT