Question

What is the expected return and the standard deviation for Tiffin Co. stock?

Tiffin Co.

Scenario	Probability of Scenario	Rate of Return
Poor Case	0.25	6%
Most Likely	0.50	10%
Good Case	0.25	14%

Assume that you are holding the following portfolio:

	Amount Invested
Stock X	$16,000	Beta = 1.3
Stock Y	$48,000	Beta = 1.8
Stock Z	$96,000	Beta = 2.2

If the risk-free rate of return is 2% and the market risk premium is 7%, then what is the required return on the portfolio?

Answer 1

1.Expected return=Respective return*Respective probability

=(0.25*6)+(0.5*10)+(0.25*14)

=10%

probability	Return	probability*(Return-Expected Return)^2
0.25	6	0.25*(6-10)^2=4
0.5	10	0.5*(10-10)^2=0
0.25	14	0.25*(14-10)^2=4
		Total=8%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(8)^(1/2)

=2.83%(Approx)

2.Total value=(16000+48000+96000)=$160000

Portfolio beta=Respective beta*Respective weight

=(16000/160000*1.3)+(48000/160000*1.8)+(96000/160000*2.2)

=1.99

Required return=risk free rate+Beta*market risk premium

=2+(1.99*7)

=15.93%