Question 7 You expect that the likelihood of economic recession and boom is 20% and 80% respectively. Based on this basic forecast, you further estimate the returns for two stocks when the economy state is either recession and boom. Your estimation is as follow: Probability of State of Economy State of Economy Returns if State Occurs Stock A Stock B Recession 0.20 -0.30 -0.01 Boom 0.80 0.15 0.10 The market risk premium is 4%, and the risk-free rate is 1.5%. a) What are the expected returns of the two stocks? b) What are the standard deviations of the two stocks? c) What are the beta of the two stocks?
Question 7 You expect that the likelihood of economic recession and boom is 20% and 80% respectively. Based on this basic forecast, you further estimate the returns for two stocks when the economy state is either recession and boom. Your estimation is as follow: Probability of State of Economy State of Economy Returns if State Occurs Stock A Stock B Recession 0.20 -0.30 -0.01 Boom 0.80 0.15 0.10 The market risk premium is 4%, and the risk-free rate is 1.5%. a) What are the expected returns of the two stocks? b) What are the standard deviations of the two stocks? c) What are the beta of the two stocks?
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
Related questions
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Question 7
You expect that the likelihood of economic recession and boom is 20% and 80% respectively.
Based on this basic forecast, you further estimate the returns for two stocks when the economy
state is either recession and boom. Your estimation is as follow:
Probability of State of
Economy
State of Economy
Returns if State Occurs
Stock A
Stock B
Recession
Boom
0.20
-0.30
-0.01
0.80
0.15
0.10
The market risk premium is 4%, and the risk-free rate is 1.5%.
a) What are the expected returns of the two stocks?
b) What are the standard deviations of the two stocks?
c) What are the beta of the two stocks?
d) Based on your calculation in b and c, which stock is risker in terms of total risk, which stock
is riskier in terms of systematical risk?
e) If you invest 50% in stock A and 50% in stock B, what is the expected return and standard
deviation of your portfolio?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education