Creed owns LG stock and he estimates the following returns are likely depending on the state of the economy. Economy Probability Payoff Recession .30 -5.0% Normal .50 10.0% Boom .20 22.0% Based on his estimates; what is the expected return of the stock and what is the standard deviation of GE's returns?

Creed owns LG stock and he estimates the following returns are likely depending on the state of the economy. Economy Probability Payoff Recession .30 -5.0% Normal .50 10.0% Boom .20 22.0% Based on his estimates; what is the expected return of the stock and what is the standard deviation of GE's returns?

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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Investor Bill Johnston is interested in the stock of Designs Unlimited. There is 7 percent probability of a slower than normal economy, 22 percent probability of a normal economy, 46 percent probability of a better than average economy, and 25 percent probability of a fast growing economy. A stock has returns of −20.9 percent, 4.5 percent, 12.3 percent and 28 percent in these states of the economy, respectively. What is the stock's expected return?
1. Suppose your expectations regarding the stock market are as follows: State of the Probability HPR Economy Boom 0.3 33% Normal growth 0.3 19 Recession 0.4 -15 a. What is the expected return, variance and standard deviation? 2. Assume that you manage a risky portfolio with an expected rate of return of 13% and a standard deviation of 29%. The T-bill rate is 5%. Your client chooses to invest 75% of a portfolio in your fund and 25% in a T-bill money market fund. a. What is the expected return and standard deviation of your client's portfolio? b. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio? Explain the sharp ratio.
If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company. Year 1 $ 62.18 40.30 2.35 a. High target price b. Low target price Year 2 $67.29 43.18 2.58 Year 3- $74.18 39.27 2.73 Year 4 $78.27 46.21 High price Low price EPS Earnings are expected to grow at 9 percent over the next year. 6. What is the high target stock price in one year? 32.16. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g.. b. What is the low target stock price in one year? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. 2.890
You recently purchased a stock that is expected to earn 25 percent in a booming economy, 10 percent in a normal economy, and lose 38 percent in a recessionary economy. There is a 10 percent probability of a boom and a 75 percent chance of a normal economy. What is standard deviation on this stock?
Dotbomb’s stock has the following projected rates of return (outcomes): 10%, 15%,and 30%. The probabilities of their outcomes are 15%, 50%, and 35% respectively. a.What are the expected return and standard deviation of Dotbomb’s stock?b. What is the probability that Dotbomb stock will earn a return no more than 15%?c. What is the probability that Dotbomb stock will earn a return less than 15%
An analyst is studying the movement of the stock ABC. His research and came up with a different rates of return for ABC, 25% for strong and 10% for weak economic scenarios. Based on the latest economic outlook, the probability of having a strong, normal, and weak economy, are 30%, 50%, and 20%, respectively. The total expected return of ABC stock is 17% considering the various probabilities. Determine the rate of return of ABC if the economy turns normal.
A stock market analyst estimates that there is a 25% probability that the economy will be weak, a 50% chance the economy will be average, and a 25% chance the economy will be strong. The analyst also estimates that Blue Co.’ stock will have a 5% return if the economy is weak, a 15% return if the economy is at average, and a 30% return if the economy is strong. What is the coefficient of variation for Blue’ stock on the basis of the foregoing estimates? a. 0.51544 b. 0.54934 c. 0.25448 d. 3.22104
Ebenezer Scrooge has invested 65% of his money in share A and the remainder in share B. He assesses their prospects as follows: A B Expected return (%) 16 21 Standard deviation (%) 23 27 Correlation between returns 0.5 What are the expected return and standard deviation of returns on his portfolio? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. How would your answer change if the correlation coefficient were 0 or −0.50? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Is Mr. Scrooge’s portfolio better or worse than one invested entirely in share A, or is it not possible to say?
A stock can either return -10% in recession or a +20% when the economy is doing well. If both possibilities are equally likely what is the expected return and standard deviation. If the T.Bill rate is 5% and investors conlude that that the stock is neither overpriced or underpriced )priced right), what must be the market risk of the stock. Explain.
Suppose your expectations regarding the stock market are as follows: State of the Economy Boom Normal growth Recession E (r) = Σs=1 P(s)r(s) Var (r) = ² = Probability 0.3 0.4 0.3 Σs ₁ p (s)[r (s)- E (r)]² HPR 44% 14 -16 SD (r) = 0 = Var (r) Required: Use above equations to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUT = 1.8. Under current conditions, what is rUT, the required rate of return on UT Stock? Round your answer to one decimal place. % Now suppose rRF increases to 6%. The slope of the SML remains constant. How would this affect rM and rUT? I. Both rM and rUT will remain the same.II. Both rM and rUT will increase by 1 percentage point.III. rM will remain the same and rUT will increase by 1 percentage point.IV. rM will increase by 1 percentage point and rUT will remain the same.V. Both rM and rUT will decrease by 1 percentage point. Now suppose rRF decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUT? I. Both rM and rUT will increase by 1 percentage point.II. Both rM and rUT will remain the same.III. Both rM and rUT will decrease by 1 percentage point.IV. rM will decrease…
You were analyzing a stock and came up with the following probability distribution of the stock returns. What is the coefficient of variation on the company's stock?Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. State of the Economy Probability of State Occurring Stock's Expected Return Boom 25.00% 24.15% Normal 46.00% 17.40% Recession 29.00% 6.20% Group of answer choices

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