Question 2: Consider the information given in the Table 2A and complete Table 2B. From the completed Table 2B, use the information to grpahically present the Security Market Line (SML). Compute the slope of this line. Hints: i) ii) When 100% money is invested in asset X (portfolio weight 1), the beta of the portfolio is 0.85 Since the risk-free asset is, well, risk-free, its beta will be zero Table 2A Expected return for asset x (%) 13 Risk free rate (%) 5 Beta of asset X 0.85 Table 2B Expected portfolio Portfolio beta return Proportion of portfolio in Asset X 0.00 0.25 0.50 0.75 1.00 1.25 2 Question 1: 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)
Question 2: Consider the information given in the Table 2A and complete Table 2B. From the completed Table 2B, use the information to grpahically present the Security Market Line (SML). Compute the slope of this line. Hints: i) ii) When 100% money is invested in asset X (portfolio weight 1), the beta of the portfolio is 0.85 Since the risk-free asset is, well, risk-free, its beta will be zero Table 2A Expected return for asset x (%) 13 Risk free rate (%) 5 Beta of asset X 0.85 Table 2B Expected portfolio Portfolio beta return Proportion of portfolio in Asset X 0.00 0.25 0.50 0.75 1.00 1.25 2 Question 1: 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)
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Chapter12: Investing In Stocks And Bonds
Section: Chapter Questions
Problem 4LO
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Transcribed Image Text:Question 2:
Consider the information given in the Table 2A and complete Table 2B.
From the completed Table 2B, use the information to grpahically
present the Security Market Line (SML). Compute the slope of this
line.
Hints:
i)
ii)
When 100% money is invested in asset X (portfolio weight
1), the beta of the portfolio is 0.85
Since the risk-free asset is, well, risk-free, its beta will
be zero
Table 2A
Expected return for asset x (%) 13
Risk free rate (%)
5
Beta of asset X
0.85
Table 2B
Expected
portfolio
Portfolio
beta
return
Proportion of portfolio
in Asset X
0.00
0.25
0.50
0.75
1.00
1.25
2
Transcribed Image Text:Question 1:
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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