Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possiblecircumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated returnexpected to result during each state of nature by its probability of occurrence.Consider the following case:David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters ofDavid's portfolio value consists of FF's shares, and the balance consists of PP's shares.Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks indifferent market conditions are detailed in the following table:Market Condition Probability of Occurrence Falcon Freight Pheasant Pharmaceuticals0.200.350.45StrongNormalWeak40%24%-32%56%32%-40%Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the threepossible market conditions next year.The expected rate of return on Falcon Freight's stock over the next year is • The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is• The expected rate of return on David's portfolio over the next year isThe expected returns for David's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time totime, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuousprobability distribution graph.For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph:PROBABILITY DENSITY-40-200Company ACompany B20RATE OF RETURN (Percent)4060

Probability distribution of returns on two stocks have been provided. We need to find the expected…

David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence 0.20 0.35 0.45 Strong Normal Weak Falcon Freight Pheasant Pharmaceuticals 40% 24% -32% 56% 32% -40% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the th possible market conditions next year. • The expected rate of return on Falcon Freight's stock over the next year is

David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence 0.20 0.35 0.45 Strong Normal Weak Falcon Freight Pheasant Pharmaceuticals 40% 24% -32% 56% 32% -40% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the th possible market conditions next year. • The expected rate of return on Falcon Freight's stock over the next year is

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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Willis currently has $190,000 invested in a four-stock portfolio with a beta coefficient equal to 1.5. Willis plans to sell one of the stocks in his portfolio for $38,000, which will increase the portfolio's beta to 1.7. What is the beta coefficient of the stock Willis plans to sell? Do not round intermediate calculations. Round your answer to two decimal places.
Willis currently has $130,000 invested in a four-stock portfolio with a beta coefficient equal to 0.9. Willis plans to sell one of the stocks in his portfolio for $52,000, which will increase the portfolio's beta to 1.1. What is the beta coefficient of the stock Willis plans to sell? Do not round intermediate calculations. Round your answer to two decimal places.
Ted owns three stocks. The table below summarizes his holdings and the expected return for each stock in the portfolia: STOCK Holding Expected Return DIS 70,000 4% AMZN 72, 000 4% GM 73,000 8% What is the expected return of Ted's portfolio? (Enter your answer as a whole number plus two decimal places. 1. e. 2.25, not 0.0225)
Rachel is a financial investor who actively buys and sells in the securities market. Now she has aportfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and$5,500 of Share D.Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The riskpremium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflationrate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model(CAPM)
Investor X invested in three stocks equally. Return on his portfolio is 18%. Return of Stock A is 14% Return of Stock B is 15%. What is the return on Stock C?
Mr. Jones has a 2-stock portfolio with a total value of $550,000. $185,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 19.10%, Stock B is 8.95%, and correlation between Stock A and Stock B is –0.90, what would be the expected risk on Mr. Jones’ portfolio (standard deviation of the portfolio return)?Calcualte with at least 4 decimal places and 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. A. 3.31% B. 2.80% C. 2.16% D. 3.14% E. 3.00%
In your portfolio, you own Delta Air Lines and Coca Cola Company stock in which you initially purchase ten shares of each stock at $85 and $30 respectively. At the end of a month, DAL is valued at $90 and KO is valued at $28. Assume, they don’t pay a dividend. What is the initial value of the investment? What is the return (expressed as a percent) for Delta at the end of the first month? What is the return (expressed as a percent) for Coke at the end of the first month?
You are an active investor in the securities market and you have established an investment portfolio of two stock A and B five years ago. Required: a)If your portfolio has provided you with returns of 9.7%, -6.2%, 12.1%, 11.5% and 13.3% over the past five years, respectively. Calculate the geometric average returnof the portfolio for this period? ? b)Assume that expected return of the stock A in your portfolio is 14.6%. The risk premium on the stocks of the same industry are 5.8%, the risk-free rate of return is 5.9% and the inflation rate was 2.7. Calculate beta of thisstock using Capital Asset Pricing Model(CAPM) ? c)Assume that you bought 200 stock B in your portfolio for total investment of $1200, now the market price of the stock is $75, the dividend paid for this stock is $2 each year. How much is the capital gain of this stock ? d)Assume that the following data available for the portfolio, calculate the expected return, variance and standard deviation of the portfolio given…
Rachel is a financial investor who actively buys and sells in the securities market. Now she has aportfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and$5,500 of Share D.Required:(a) Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflationrate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM). (b) Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate theexpected return, variance and standard deviation of the portfolio. State of economy Probability Rate of returnsMild Recession 0.35 - 5%Growth 0.45 15%Strong Growth 0.20 30%
Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of $60 and pays an annual dividend of $5.60 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 7.1%. a. What is the market value of the outstanding preferred stock? b. If an investor purchases the preferred stock at the value calculated in part a, how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has risen to 8.6%?

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