Question 1: 8 marks The following data are available about the returns of two stocks and market portfolio: Economic State Probability Stock A (%) Stock B (%) Market portfolio (%) Deep Recession 0.05 -3 -2 -13 Mild Recession 0.20 6 9 1 Average 0.50 11 12 15 Mild Boom 0.20 14 15 29 Strong Boom 0.05 19 26 43 Table 1 You are required to: a) Compute the expected return for stocks A and B (2 marks) b) Compute the standard deviation for stocks A and B. Which stock is riskier? (3 marks) c) Compute the expected return of a portfolio that comprises of 70% stock A and 30% stock B (1 mark) d) Compute the standard deviation of returns for the market portfolio (1 mark) e) Which, among stocks A, B and the market is riskier? Respond in light of your computations (1 mark)

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter5: Financial Options
Section: Chapter Questions
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Question 1: 8 marks
The following data are available about the returns of two stocks and
market portfolio:
Economic State Probability
Stock A (%)
Stock B (%)
Market portfolio (%)
Deep Recession
0.05
-3
-2
-13
Mild Recession
0.20
6
9
1
Average
0.50
11
12
15
Mild Boom
0.20
14
15
29
Strong Boom
0.05
19
26
43
Table 1
You are required to:
a) Compute the expected return for stocks A and B (2 marks)
b) Compute the standard deviation for stocks A and B. Which stock
is riskier? (3 marks)
c) Compute the expected return of a portfolio that comprises of 70%
stock A and 30% stock B (1 mark)
d) Compute the standard deviation of returns for the market
portfolio (1 mark)
e) Which, among stocks A, B and the market is riskier? Respond in
light of your computations (1 mark)
Transcribed Image Text:Question 1: 8 marks The following data are available about the returns of two stocks and market portfolio: Economic State Probability Stock A (%) Stock B (%) Market portfolio (%) Deep Recession 0.05 -3 -2 -13 Mild Recession 0.20 6 9 1 Average 0.50 11 12 15 Mild Boom 0.20 14 15 29 Strong Boom 0.05 19 26 43 Table 1 You are required to: a) Compute the expected return for stocks A and B (2 marks) b) Compute the standard deviation for stocks A and B. Which stock is riskier? (3 marks) c) Compute the expected return of a portfolio that comprises of 70% stock A and 30% stock B (1 mark) d) Compute the standard deviation of returns for the market portfolio (1 mark) e) Which, among stocks A, B and the market is riskier? Respond in light of your computations (1 mark)
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