Based on the following information Calculate State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.20 0.05 -0.17 Normal 0.55 0.08 0.12 Boom 0.25 0.13 0.29 a) The expected return of Stock A b) The expected return of Stock B c) The expected return of Portfolio where you invest $35,000 in Stock A and $45,000 in Stock B d) Suppose Stock A has a beta of 0.8 and Stock B has a beta of 1.3. If you invest $35,000 in Stock A and $45,000 in Stock B, what is the beta of this portfolio? e) Expected return on the market (RM ) is 10% and the risk-free (rf) is 4%. What must the the expected return on the portfolio according to CAPM? (Use the beta you have calculated in section d) for CAPM)
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.
Based on the following information Calculate
|
State of Economy |
Probability of State of Economy |
Stock A Stock B |
|
|
Recession |
0.20 |
0.05 |
-0.17 |
|
Normal |
0.55 |
0.08 |
0.12 |
|
Boom |
0.25 |
0.13 |
0.29 |
a) The expected return of Stock A
b) The expected return of Stock B
c) The expected return of Portfolio where you invest $35,000 in Stock A and $45,000 in Stock B
d) Suppose Stock A has a beta of 0.8 and Stock B has a beta of 1.3. If you invest $35,000 in Stock A and $45,000 in Stock B, what is the beta of this portfolio?
e) Expected return on the market (RM ) is 10% and the risk-free (rf) is 4%. What must the the expected return on the portfolio according to
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