Question

QUESTION TWO [35]

The following information relates to Netherton’s investment performance, during various economic conditions. estimate the expected return and overall risk (standard deviation) of this investment.

Economic Conditions | Probability | Expected Return |

Boom | 0.20 | +40% |

Normal | 0.60 | +15% |

Recession | 0.20 | -10% |

Required:

2.1. Calculate the expected risk of return of this investment. (10)

2.2. Estimate the overall risk (standard deviation) of this investment. (15)

2.3. Discuss the difference between expected return and required return. (10)

Answer #1

The return on shares of Fast Transportation Company is predicted
under the following various economic conditions:
Recession -0.11
Normal +0.09
Boom +0.20
If each economic state has the same probability of occurring
(33.33%), what is the expected return of the stock?
*Place your answer in decimal form with four decial points. That
is, an answer of fifteen and two-thirds would be inputted as
.1567.

The following table provides information about the portfolio
performance of three investment managers: Manager Return Standard
Deviation Beta A 25% 22% 2.1 B 21% 19% 1.5 C 15% 10% 0.8 Market (M)
15% 12% Risk Free Rate = 5% Complete the following table: Manager
Expected Return Sharpe Ratio Treynor Ratio Jensen’s Alpha A B C
Rank

The following table provides information about the portfolio
performance of three investment managers:
Manager
Return
Standard Deviation
Beta
A
25%
22%
2.1
B
21%
19%
1.5
C
15%
10%
0.8
Market (M)
15%
12%
Risk Free Rate = 5%
Complete the following table:
Manager
Expected Return
Sharpe Ratio
Treynor Ratio
Jensen’s Alpha
A
B
C
Rank

The following table provides information about the portfolio
performance of three investment managers:
Manager
Return
Standard Deviation
Beta
A
25%
22%
2.1
B
21%
19%
1.5
C
15%
10%
0.8
Market (M)
15%
12%
Risk Free Rate = 5%
Complete the following table:
Manager
Expected Return
Sharpe Ratio
Treynor Ratio
Jensen’s Alpha
A
B
C
Rank

Consider the following information: Rate of Return if State
Occurs State of Economy Probability of State of Economy Stock A
Stock B Recession 0.20 0.02 -0.17 Normal 0.60 0.08 0.12 Boom 0.20
0.16 0.35 Required: Given that the expected return for Stock A is
8.400%, calculate the standard deviation for Stock A. (Do not round
your intermediate calculations.)

During a normal economy, an investment in common stock of
D&F Oil provides 15 percent per annum rate of return. During a
recession, the rate of return is negative 12 percent and during a
boom, the rate of return is 35 percent. The probability of a normal
economy is 80 percent while the probability of a recession is 8
percent and the probability of a boom is 12 percent.
What is the expected return for Millennial Lithium Inc.?
What is...

Consider the following information regarding a new investment
that a company intends to undertake:.
State of the Economy
Probability
Market Return
Investment Return
Expansion
0.30
40%
60%
Normal
0.50
10%
25%
Recession
0.20
-15%
-40%
a). Compute the variance and standard deviation of each
b). Compute the correlation between the market the investment
return(s)
c). Compute the beta of the investment
d). Assuming the risk free rate is 5% p.a. Compute the required
rate return and advice if the investment...

question 7
An investment earned the following returns for the years 2013
through 2016:15%, 5%, 30%, and 10%. What is the variance of returns
for this investment?
Select one:
a. 0.1541
b. 0.0892
c. 0.1747
d. 0.0323
e. 0.0117
question 8
Given the following information, what is the standard deviation
of stock A if it has an expected return of 33% in a boom economy,
an expected return of 18% in a good economy, and an expected return
of 2%...

Stock A has the following returns for various states of the
economy:
State of Economy Probability Stock A's Return
Recession 5% -50%
Below average 25% -3%
Average 35% 10%
Above average 20% 20%
Boom 15% 45%
Stock A's standard deviation of returns is _______
20.62%
4.25%
6.47%
11%

Consider the following information:
Rate of Return if State Occurs
State of Economy
Probability of State of Economy
Stock A
Stock B
Recession
.10
.04
–.21
Normal
.50
.09
.15
Boom
.40
.15
.35
Calculate the expected return for Stock A.
Calculate the expected return for Stock B.
Calculate the standard deviation for Stock A.
Calculate the standard deviation for Stock B.

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