Problem 12-14 Expected Returns (LO2)Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, anaggressive stock A, and a defensive stock D.Rate of ReturnAggressive DefensiveStock A10%ScenarioBustMarket7%19Stock D-5%Boom2515Required:a. Find the beta of each stock.b. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.c. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks?d. Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

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Problem 12-14 Expected Returns (LO2) Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Rate of Return Scenario Bust Boom Aggressive Defensive Stock A 10% Market -7% 19 Stock D 5% 25 15 Pequired: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

Problem 12-14 Expected Returns (LO2) Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Rate of Return Scenario Bust Boom Aggressive Defensive Stock A 10% Market -7% 19 Stock D 5% 25 15 Pequired: Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?

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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Consider the following table, which gives a security analyst's expected return on two stacks and the market i Aggressive Defensive Scenario Probability Market Return Stack Stock 1 0.5 0.5 2.6% 4.4% 16 27 Required: a. What are the belas of the two storks? (Round your answers to 2 decimal places.) Beta A Beta D b. What is the expected rate of return on each stack? (Round your answers to 2 decimal places.) Rate of return on A Rata of return on D % %
5- Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 10% 15 Correlation = -1 Standard Deviation 5% 10 Suppose that it is possible to borrow at the risk-free rate, ry. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.)
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5 Consider the following information: Probability of State of State of Economy Boom Good Poor Bust Economy 15 .45 .35 .05 a. Rate of Return if State Occurs a. Expected return b-1. Variance b-2. Standard deviation Stock A Stock B Stock C .36 46 .26 .21 .17 10 -.03 -.17 Your portfolio is invested 22 percent each in A and C, and 56 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.) % -.06 -.21 % -.04 -.07
es Consider the following information on three stocks: State of Economy Boom Normal Bust Probability of State of Economy .20 .40 .40 Rate of Return If State Occurs Stock A .34 .25 .03 Stock B .46 .23 -.25 Stock C .50 .20 - .42 a-1. If your portfolio is invested 35 percent each in A and B and 30 percent in C, what is the portfolio expected return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .32161.) a-3. 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.) b. If the expected T-bill rate is 4.50 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations abd enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. If the expected inflation rate…
Question 25 (2.5 points) Listen The risk-free rate is 1.45% and the market risk premium is 5.21%. According to the Capital Asset Pricing Model (CAPM), a stock with a beta of 1.13 will have an %. expected return of 1) 7.34% 2) 15.66% 3) 5.56% 4) 9.12% 5) 13.25%
2 Problem 2: Consider a market composed of only two risky assets, A and B, with the following properties: a StockA Expected return 25%, SD 20% StockB Expected return 15%, SD 25% a) Suppose their correlation is 0.8. What is the expected return of the following portfolios: one that invests 0% in A, one that invests 10% in A, 20% in A and so on until 100%? Plot the portfolio frontier formed by these portfolios.b) Repeat part (1) under the assumption that the correlation is -0.8.c) Explain in detail what is the intuition behind the difference across the answers you found for part (1) and part (2).
Question four Risk is usually measured in terms of the volatility in the historical returns generated by shares. Is this a good indicator of future risks in fast changing sectors? What implications does this have for the analysis of risk? Question five Explain briefly what beta (the relative risk) measures. Is this the only type of risk that a fim faces? Question six (a) Stocks A and market have the following estimated returns: RA RM year 2018 -18% -24% 2019 44% 24% 2020 -22% -4% 2021 22% 8% 2022 34% 56% Required to )Calculate the expected rate of return for stock A and Market đuring the 5-year period. (ii) Now calculate the total risk of stock A and Market (b)The market M and Stock J have the following probability distributions: State of the economy Probability RM RJ Вoom 0.3 15% 20% Depression Recovery 0.4 9% 5% 0.3 18% 12% Required to (1) Calculate the expected rates of retum for the market and Stock J. (ii) Calculate the standard deviations for the market and Stock J.
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 4%, and all stocks have independent firm-specific components with a standard deviation of 49%. Portfolios A and B are both well diversified. Portfolio Beta on M1 Beta on M2 Expected Return (%) A 1.6 2.4 39 B 2.3 -0.7 9 Required: What is the expected return–beta relationship in this economy?
A4 6 b b. Suppose we observe two stocks with the following characteristics: Stock Expected return Beta M 20% 1.6 N 12% 0.9 An asset is said to be undervalued if its price is too low given its expected return and risk. The risk-free rate is currently 6%. Is one of the two stocks undervalued relative to the other? Explain your answer fully (i.e., provide reasons why you think the stock is or is not undervalued).
What are the expected returns for stock A and stock B? State Probability Return on A Return on B Boom .60 0.35 0.10 Bust .40 0.05 0.25 a. 15.50%, 10.83% b. 26.00%, 14.50% c. 23.00%, 16.00% d. 21.50%, 16.75%
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