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a) Share A and Share B have the following returns under different states of the economy. State of economy Recession Normal Boom Calculate the following: Probability 0.2 0.5 0.3 Share A (Returns) (10%) 13% 25% i) The expected rate of returns for both shares. Share B (Returns) 11% 7% 8%

a) Share A and Share B have the following returns under different states of the economy. State of economy Recession Normal Boom Calculate the following: Probability 0.2 0.5 0.3 Share A (Returns) (10%) 13% 25% i) The expected rate of returns for both shares. Share B (Returns) 11% 7% 8%

Essentials Of Investments
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
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a) Share A and Share B have the following returns under different states of the economy. State of economy Recession Normal Boom Calculate the following: c) Probability 0.2 0.5 0.3 Share A (Returns) (10%) 13% 25% i) The expected rate of returns for both shares. ii) The standard deviation for both shares. Share B (Returns) 11% 7% 8% iii) On a stand-alone basis, discuss which share out of the two is riskier. b) If given that the correlation between the two shares above is -0.7455, comment on the overall portfolio risk and on the level of diversification. Explain unsystematic risk and elaborate ONE way to reduce this type of risk (diagrams are not necessary).
Transcribed Image Text:a) Share A and Share B have the following returns under different states of the economy. State of economy Recession Normal Boom Calculate the following: c) Probability 0.2 0.5 0.3 Share A (Returns) (10%) 13% 25% i) The expected rate of returns for both shares. ii) The standard deviation for both shares. Share B (Returns) 11% 7% 8% iii) On a stand-alone basis, discuss which share out of the two is riskier. b) If given that the correlation between the two shares above is -0.7455, comment on the overall portfolio risk and on the level of diversification. Explain unsystematic risk and elaborate ONE way to reduce this type of risk (diagrams are not necessary).
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