Question

A stock will provide a rate of return of either ?28% or 33%.

a. If both possibilities are equally likely, calculate the stock's expected return and standard deviation. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

Expected return %

Standard deviation %

b. If Treasury bills yield 2.5% and investors believe that the stock offers a satisfactory expected return, what must the market risk of the stock be? (Enter your answer as a whole percent.)

Market risk %

??PLEASE HELP WITH PART B!! THATS WHAT I REALLY NEED

Answer 1

a) Since, both the return is equally likely, there will be 50:50 chance for both return.

Expected Stock = 50% x 28% + 50% x 33% = 30.5%

SD = Sqrt[0.5*(0.28)² + 0.5(0.33)² - (0.305)²] = 2.5%

b) Market risk is coming in terms of risk premium paid on the Expected return of the stock.

Risk premium = Stock return - Risk free rate = 30.5% - 2.5% = 28%

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Please provide feedback on final ans.........Plz get back for question, clarification...........All the best

[ Please note beta for stock cannot be calculated since Be needs cov() of market return and stock return]

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Please provide feedback on final ans.........Plz get back for question, clarification...........All the best