A stock is expected to return 8% in a normal economy, 12% if the economy booms, and lose 6% if the economy moves into a recessionary period. Economists predict a 56% chance of anormal economy, a 24% chance of a boom, and a 20% chance of a recession. The expected return on the stock is%.

State Return Probability Normal Economy 8% 56% Boom 12% 24% Recession -6% 20% To Find: Expected return on stockFormula's Calculations: Therefore; the Expected return on the stock is 6.16%

Answered: A stock is expected to return 8% in a…

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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1. Suppose your expectations regarding the stock market are as follows: State of the Probability HPR Economy Boom 0.3 33% Normal growth 0.3 19 Recession 0.4 -15 a. What is the expected return, variance and standard deviation? 2. Assume that you manage a risky portfolio with an expected rate of return of 13% and a standard deviation of 29%. The T-bill rate is 5%. Your client chooses to invest 75% of a portfolio in your fund and 25% in a T-bill money market fund. a. What is the expected return and standard deviation of your client's portfolio? b. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio? Explain the sharp ratio.
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Investors require a return of 14.15 percent on Industrial Industries stock and require a return of 10.90 percent on the market. If the stock has a beta of 1.5. What is the risk-free rate of return?
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A stock is expected to return 8% in a normal economy, 12% if the economy booms, and lose 6% if the economy moves into a recessionary period. Economists predict a 56% chance of a normal economy, a 24% chance of a boom, and a 20% chance of a recession. The expected return on the stock is %.