(a) Stocks A and market have the following estimated retuns:RARMyear2018-18%-24%201944%24%2020-22%-4%202122%8%202234%56%Required to(1)Calculate the expected rate of return for stock A and Market during the 5-year period.(ii) Now calculate the total risk of stock A and Market

Expected rate of return refers to the amount of interest that is received in investment in future .…

(a) Stocks A and market have the following estimated returns: RA RM year 2018 -18% -24% 2019 44% 24% 2020 -22% -4% 22% 34% 2021 8% 2022 56% Required to @Calculate the expected rate of retun for stock A and Market đuring the 5-year period. (i1) Now calculate the total risk of stock A and Market

(a) Stocks A and market have the following estimated returns: RA RM year 2018 -18% -24% 2019 44% 24% 2020 -22% -4% 22% 34% 2021 8% 2022 56% Required to @Calculate the expected rate of retun for stock A and Market đuring the 5-year period. (i1) Now calculate the total risk of stock A and Market

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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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

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

(a) Stocks A and market have the following estimated retuns:
RA
RM
year
2018
-18%
-24%
2019
44%
24%
2020
-22%
-4%
2021
22%
8%
2022
34%
56%
Required to
(1)Calculate the expected rate of return for stock A and Market during the 5-year period.
(ii) Now calculate the total risk of stock A and Market

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You are given the following information for Securities J and K for the coming year: State of Nature Probability Return J 20.00% 14.00% 50.00% 19.00% 30.00% 16.00% 1 2 3 Return K 14.00% 16.00% 25.00% You create a portfolio, with 40 percent of your money invested in Security K, and the rest of your money invested in Security J. Given this information, determine the standard deviation of this portfolio for the coming year. O 0.0301 O 0.0239 O 0.0195 O 0.0263 O 0.0154
You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%.a. What are the betas of Stocks X and Y?b. What are the required rates of return on Stocks X and Y?c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
Refer to the table below. Assume En. Nazril held the portfolio consisting of 50% of Stock B and 50% of Stock V. Year Stock B's Return, rB | Stock V's Return, rV 2015 -18% -14.5% 2016 33% 21.8% 2017 15% 30.5% 2018 -0.50% -7.6% 2019 27% 26.3% i. What would be the average return on the portfolio for the period of 2015-2019. ii. Calculate the standard deviation for the portfolio.
11. Changesto the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. (Tool tip: Mouse over the points in the graph to see their coordinates.) REQUIRED RATE OF RETURN (Percent) 20.0 16.0 12.0 8.0 4.0 O Do 0.5 ■ 1.0 RISK (Beta) 1.5 2.0 (?)
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% Вoom 0.1 -20% 1.00 d- Find the expected return and standard deviation of this portfolio? 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.
Consider three stocks: Q, R and S Beta STD (annual) Forecast for Nov 2009 Dividend Stock Price Q 0.45 35% $0.50 $45 R 1.45 40% 0 $75 S -0.20 40% $1.00 $20 Use a risk free rate of 2.0% and an expected market return of 9.5%. The market's standard deviation is 18%. Assume that the next dividend will be paid after one year, at t=1. Required: According to CAPM, what is the expected rate of return of each stock?
If a portfolio manager expects the market to go down by 2% next year, which stock should the manager buy? (these are betas) A. -1B. - .5 C. OD. 1E. 2
Historical Realized Rates of Return You are considering an investment in either individual stocks or a portíolio of stocks. The two stocks you are researching, Stock A and Stock B, have the folloving historical retums: Year 2015 -22.00% -4.00% 2016 34.00 17.00 2017 29.00 -15.00 2018 -2.00 46.00 2019 30.00 25.00 a. Calculate the average rate of return for each stock during the 5-year period. Do not round intermediate calculations. Round your ansvers to two decimal places. Stock A: Stock 8: b. Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? Do not round intermediate calculations. Round your ansviers to bwo decimal places. Negative values, if any, should be indicated by a minus sign. Year Portfolio 2015 2016 2017 2018 2019 Average return c. Calculate the standard deviation of returns for each stock…
The table below provides five years of realized returns for both Stock XYZ and the market portfolio. Use this information to estimate Stock XYZ's beta with the market. Year Year Year Year Year 1 2 3 4 Stock 2% 17% 27% 23% -9% XYZ Return Market -6% 17% -7% 13% -3% Return 0.4413 0.4797 0.5181 O 0.5565 O 0.5949
Stocks A and B have the following historical returns: Stock A's Returns (24.25%) 18.50 38.67 14.33 39.13 Year 2015 2016 2017 2018 2019 Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B and the portfolio over this time period using their average returns? Answers: a) Sharpe ratio for Stock A b) Sharpe ratio for Stock B 0.5332 0.8839 c) Sharpe ratio for Portfolio AB Stock B's Returns 5.50% 26.73 48.25 (4.50) 43.86 Note: enter your answers with 4 decimal places
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