11.2. Below are the expected returns from both stocks based on the probability of economic conditions. It is desired to create a portfolio from two stocks. It is decided to invest 30% in stock A and 70% in stock B. Stock A State (i) p(i) E(R) Recession 0.50 -40% Neutral 0.40 15% Boom 0.10 30% 1.00 Stock B State (i) p(i) E(R) Recession 0.5 40% Neutral 0.40 15% Boom 0.1 -20% 1.00
11.2. Below are the expected returns from both stocks based on the probability of economic conditions. It is desired to create a portfolio from two stocks. It is decided to invest 30% in stock A and 70% in stock B. Stock A State (i) p(i) E(R) Recession 0.50 -40% Neutral 0.40 15% Boom 0.10 30% 1.00 Stock B State (i) p(i) E(R) Recession 0.5 40% Neutral 0.40 15% Boom 0.1 -20% 1.00
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:11.2. Below are the expected returns from both stocks based on the
probability of economic conditions. It is desired to create a
portfolio from two stocks. It is decided to invest 30% in stock A
and 70% in stock B.
Stock A
State (i)
p(i)
E(R)
Recession
0.50
-40%
Neutral
0.40
15%
Воom
0.10
30%
1.00
Stock B
State (i)
p(i)
E(R)
Recession
0.5
40%
Neutral
0.40
15%
Вoom
0.1
-20%
1.00
e- If you were a portfolio manager, what type of investors do
you recommend this portfolio and why?
f- Explain why the beta of the market is always equal to 1 and
beta of a treasury bill equal to 0.
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