Consider the following information:State of EconomyBoomProbability of State of EconomySecurity Returns if State Occurs(Stock A)Security Returns if State Occurs(Stock B)Security Returns if State Occurs(Stock C).10.18.48.33GoodPoor?.11.18.15Bust.40.30.05-.09-.05-.03-.32-.09Your portfolio is invested 30 percent each in Stocks A and C and the rest in Stock B. What is the percentage standard deviation of the portfolio?

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Answered: Consider the following information:…

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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. E(RI) = .15(.11) + .55(.18) + .30(.08) Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta WND 0.80 STA 1.35 CTE 1.15 DUY 1.20 EVN -0.20 Stock WND the economy’s RFR to be 6 percent (0.06) and the expected return on the market portfolio (E(RM)) to be 8 percent (0.08) Stock STA, the economy’s RFR to be 5percent (0.05) and the expected return on the market portfolio (E(RM)) to be 7 percent(0.07) Assume that all the other stocks is as follows since we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09),
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Consider the following states of outcomes, probabilities, and expected returns on only stocks three stocks in your portfolio; X, Y, and Z. State Probability X Y Z Boom 0.1 16% 10% 22% Semi-Boom 0.15 14% 8% 18% Normal 0.55 10% 6% 14% Mild-Recession ?? 5% 4% -10% Full-Recession 0.05 -3% 2% -12% a. What is the expected return of the portfolio if $25,000 is invested in X, $35,000 in Y, and $30,000 invested in stock Z? b. What are the standard deviations of stocks X, Y, and Z?
1) Consider the following expectations for the market and two stocks in two possible equally likely states: State Market return Stock A Stock B Boom 25% 38% 12% Recession 5% -2% 6% a. What is the expected return on each stock? b. Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph given that you have computed Stock A has a β of 2 and Stock B has a β of 0.3. c. Assuming that the CAPM holds, state for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?
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Consider the following information: State of Economy Boom Bust Probability of State of Economy .75 .25 a. Expected return b. Variance of a portfolio Rate of Return if State Occurs. Stock C .27 -.21 Stock A .07 .12 a. What is the expected return on an equally weighted portfolio of these three stocks? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C? Note: Do not round intermediate calculations and round your answer to 6 decimal places, e.g...161616. Stock B .18 -.08 %
Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom .25 .04 .33 .55 Normal .60 .09 .13 .19 Bust .15 .15 −.14 −.28 If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio’s expected return? The variance? The standard deviation? Note: Do not round intermediate calculations. Round your variance answer to 5 decimal places, e.g., .16161. Enter your other answers as a percent rounded to 2 decimal places, e.g., 32.16. If the expected T-bill rate is 3.4 percent, what is the expected risk premium on the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
. The following questions are related to modern portfolio theory. • Assume there are only two stocks in the equity market. •The risk-free rate is 1.00%. Stock Return Volatility Correlation Matrix Y 0.7 1.0 X Y X 15.00% 20.00% 1.0 10.00% 15.00% 0.7 (a) Make an investment portfolio using the risky assets that has an expected return 12%. (b) Calculate the volatility of the portfolio in (a).
1. Consider the following states of outcomes, probabilities, and expected returns on only stocks three stocks in your portfolio; X, Y, and Z. State Probability X Y Boom 0.15 16% 10% 22% Semi-Boom ?? 14% 8% 18% Normal 0.50 10% 6% 14% Mild-Recession 0.10 5% 4% -10% Full-Recession 0.10 -3% 2% -12% a. What is the expected return of the portfolio if $25,000 is invested in X, $35,000 in Y, and $30,000 invested in stock Z? b. What are the standard deviations of stocks X, Y, and Z?
Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.
Shepherd's Flock stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? State of economy Probability of State of Economy Rate of Return Recession .3 -.27 Normal .65 .16 Boom .05 .35
Consider the following information: State of Economy Boom Good Poor Bust Probability of State- of Economy 15 .55 a. Expected return b-1. Variance b-2. Standard deviation 25 .05 Rate of Return if State Occurs Stock A Stock B Stock C .33 .43 .23 .18 14 .12 -.05 -.13 a. Your portfolio is invested 26 percent each in A and C, and 48 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.) b-2. What is the standard deviation? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % -.08 -.18 % -.06 -.10

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