Question

We know the following expected returns for stocks A and B, given different states of the economy:

State (s) | Probability | E(r_{A,s}) |
E(r_{B,s}) |

Recession | 0.2 | -0.05 | 0.05 |

Normal | 0.5 | 0.1 | 0.08 |

Expansion | 0.3 | 0.18 | 0.12 |

1. What is the expected return for stock A?

2. What is the expected return for stock B?

3. What is the standard deviation of returns for stock A?

4. What is the standard deviation of returns for stock B?

Answer #1

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?

EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(7%)
(28%)
0.3
2
0
0.3
12
18
0.2
20
25
0.1
39
37
Calculate the expected rate of return, rB, for Stock
B (rA = 11.40%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 17.60%.) Do not round
intermediate calculations. Round your...

EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(5%)
(27%)
0.2
4
0
0.3
11
19
0.2
18
29
0.2
33
48
Calculate the expected rate of return, rB, for Stock B (rA =
13.80%.) Do not round intermediate calculations. Round your answer
to two decimal places.
%
Calculate the standard deviation of expected returns, ?A, for
Stock A (?B = 21.72%.) Do not round intermediate calculations.
Round your...

You've estimated the following expected returns for a stock,
depending on the strength of the economy:
State (s)
Probability
Expected return
Recession
0.3
-0.02
Normal
0.5
0.09
Expansion
0.2
0.14
1. What is the expected return for the stock?
2. What is the standard deviation of returns for the stock?

The table below shows the expected rates of return for three
stocks and their weights in some portfolio:
Stock A
Stock B
Stock C
Portfolio weights
0.3
0.2
0.5
State
Probability
Expected returns
Recession
0.2
0.08
0.03
0.14
Boom
0.8
0.13
0.05
0.15
1. What is the portfolio return during a recession?
2. What is the expected portfolio return?
3. What is the standard deviation of the portfolio returns?

Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
(10%)
(21%)
0.2
3
0
0.3
13
23
0.2
24
30
0.1
28
38
a.Calculate the expected rate of return, rB, for Stock B (rA =
10.10%.) Do not round intermediate calculations. Round your answer
to two decimal places.
b.Calculate the standard deviation of expected returns, σA, for
Stock A (σB = 20.37%.) Do not round intermediate calculations.
Round your answer to two...

EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(12%)
(20%)
0.2
6
0
0.4
16
19
0.2
21
25
0.1
34
41
Calculate the expected rate of return, rB, for Stock B (rA =
14.00%.) Do not round intermediate calculations. Round your answer
to two decimal places.
%
Calculate the standard deviation of expected returns, ?A, for
Stock A (?B = 16.17%.) Do not round intermediate calculations.
Round your...

Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(11%)
(29%)
0.2
2
0
0.4
12
20
0.2
18
30
0.1
36
44
A. Calculate the expected rate of return, rB, for Stock B (rA =
11.30%.) Do not round intermediate calculations. Round your answer
to two decimal places.
B. Calculate the standard deviation of expected returns, σA, for
Stock A (σB = 19.43%.) Do not round intermediate calculations.
Round your answer...

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...

Given the returns for two stocks with the following information,
calculate the correlation coefficient of the returns for the two
stocks. Assume the expected return is 14.4 percent for Stock 1 and
15.9 percent for Stock 2. Do not round intermediate
computations.
Prob
Stock
1 Stock
2
0.5
0.11
0.18
0.3
0.17
0.15
0.2
0.19
0.12

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