Question

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%

  1. Calculate the expected return for stock A.

  1. Calculate the expected return for stock B.

  

  1. Calculate the expected return for the TSX.
  1. Calculate the risk for stock A.
  1. Calculate the risk for stock B.

  1. Calculate the risk for the TSX.
  1. Calculate the covariance and correlation of the returns for stock A and stock B.

  1. Calculate the covariance and correlation of the returns for stock A and the TSX.

  1. Calculate the covariance and correlation of the returns for stock B and the TSX.

  1. Calculate the beta of Stock A.

  1. Calculate the beta of stock B.

  1. Calculate the beta for the TSX. (2 marks)

  1. Using an excel spreadsheet and the calculations you have done above, prepare a spreadsheet that provides the expected returns and the risk for a portfolio that invests in stock A and stock B. Prepare the calculations using 4% increments in the weights.
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