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 -10 0 7 -10 45 -20 30 Market Index -13 1 15 29 43

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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Question

1. Fill the parts in the above table that are shaded in yellow.

2.Using the data generated in the previous question (Question 1)

a. Plot the Security Market Line (SML)

b. Superimpose the CAPM’s required return on the SML

c.Indicate which investments will plot on, above and below the SML?

d.

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
Pay-Rubber-
made
10
-10
7
45
30
T-
Bills
7
7
7
7
7
Phillips
-22
-2
20
35
50
up
28
14.7
0
-10
-20
Market
Index
-13
1
15
29
43
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 Pay-Rubber- made 10 -10 7 45 30 T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 up 28 14.7 0 -10 -20 Market Index -13 1 15 29 43
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