Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay- up 28 14.7 0 -10 -20 Rubber- made 10 -10 7 45 30 Market Index -13 1 15 29 43
Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay- up 28 14.7 0 -10 -20 Rubber- made 10 -10 7 45 30 Market Index -13 1 15 29 43
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 1P
Related questions
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
Question 1
Fill the parts in the above table that are shaded in yellow.
![Consider the following information about the various states of economy and the returns of
various investment alternatives for each scenario. Answer the questions that follow.
State of the Economy
Recession
Below Average
Average
Above Average
Boom
Mean
Standard Deviation
Coefficient of Variation
Covariance with MP
Correlation with Market Index
Beta
CAPM Req. Return
Valuation
(Overvalued/Undervalued/Fairly
Valued)
Nature of stock
(Aggressive/Defensive)
Probability
0.2
0.1
0.3
0.3
0.1
% Return on T-Bills, Stocks and Market
Index
T-
Bills
7
7
7
7
7
Phillips
-22
-2
20
35
50
Pay- Rubber-
up
made
28
10
14.7
0
-10
-20
-10
7
45
30
Market
Index
-13
1
15
29
43](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F04df1633-7a0f-4a4e-9a88-1ff879bc55c4%2F7ffe4724-a704-49b0-af3b-79dc79837844%2F9g9gyww_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Consider the following information about the various states of economy and the returns of
various investment alternatives for each scenario. Answer the questions that follow.
State of the Economy
Recession
Below Average
Average
Above Average
Boom
Mean
Standard Deviation
Coefficient of Variation
Covariance with MP
Correlation with Market Index
Beta
CAPM Req. Return
Valuation
(Overvalued/Undervalued/Fairly
Valued)
Nature of stock
(Aggressive/Defensive)
Probability
0.2
0.1
0.3
0.3
0.1
% Return on T-Bills, Stocks and Market
Index
T-
Bills
7
7
7
7
7
Phillips
-22
-2
20
35
50
Pay- Rubber-
up
made
28
10
14.7
0
-10
-20
-10
7
45
30
Market
Index
-13
1
15
29
43
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