A financial analyst predicts probabilities of three economic states of a Boom 40%, Average 50 % and Bust 10%. Returns during boom - stock A 10% and stock B 2%; during average - stock A 6% and stock B 5% return; during bust - stock A -5% and stock B 12%. Given this information, determine which stock is riskier.

To achieve a zero standard deviation for a portfolio, calculate the weights of stock A and stock B, assuming the correlation coefficient is-1. Use the following information. (Round intermediate calculations and final answers to 2 decimal places, eg. 31.21%) State of the economy High growth Moderate growth Recession Weight of stock A Weight of stock B Probability of occurrence 25% 20% 55% Expected return on stock A in this state 41.5% 21.0% -8.0% % Expected return on stock B in this state 56.5% 27.0% -17.0%

Stock A has expected return of 15% and standard deviation (s.d.) 20%. Stock B has expected return 20% and s.d. 15%. The two stocks have a correlation coefficient of 0.5.   1.Note that Stock A has greater risk (s.d.) that Stock B, but a lower expected return. Explain how is this possible in a world where returns on assets are as predicted by the CAPM. 2. Determine the expected return and the s.d. of portfolio P1, composed by investing 30% in stock A and 70% in stock B. 3. Consider stock C that has expected return 15% and s.d. 15%. Stock C is uncorrelated with either stock A and stock B. Determine the expected return and s.d. of portfolio P2 made by investing 50% in stock C and 50% in portfolio P1.

From the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be recommend if investment in individual stock is to be made? Justify  answer using numerical calculations.   Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65        0.65

Consider the following information about two stocks (D and E) and two common risk factors (1 and 2) ba 1.6 2.1 Stock D E ba E(R.) 3.1 14.45% 2.1 13.90% a. Assuming that the risk-free rate is 5.5%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor betas and the expected returns for the two stocks. Round your answers to one decimal place Axt Ax b. You expect that in one year the prices for Stocks D and I will be $51 and $39, respectively. Also, neither stock is expected to pay a dividend over the next year. What should the price of each stock be today to be consistent with the expected return levets listed at the beginning of the problem? Round your answers to the nearest cent. Today's price for Stock D: Today's price for Stock E: S Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly increases by 0.33% 0e, from x to (-0.35%, where is the value established in Part . What are the new expected returns…

From the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be best recommend if investment in individual stock is to be made? Justify the answer using numerical calculations.   Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65

Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.   Factor Risk Premium Industrial production (I) 8 % Interest rates (R) 4 % Consumer confidence (C) 6 %     The return on a particular stock is generated according to the following equation:   r = 16% + 1.6I + 0.8R + 1.30C + e   a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 4%. (Do not round intermediate calculations. Round your answer to 1 decimal place.)   a-2. Is the stock over- or underpriced?

a. Determine Stock X's beta coefficient. b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise, assume that the market return is equal to the NYSE's average return. Using the information calculated, what is the assumed risk-free rate in the CAPM equation? Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)

Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Risk Premium Factor Industrial production (I) Interest rates (R) Consumer confidence (C) Required: 8% 4 7 The return on a particular stock is generated according to the following equation: r = 17% +0.9/+0.5R+0.70 C+ e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 3%. Note: Do not round intermediate calculations. Round your answer to 1 decimal place. a-2. Is the stock over- or underpriced? a-1. Equilibrium rate of return a-2 Is the stock over- or underpriced? %

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