Current Attempt in ProgressState of the EconomyRecessionAverageBoomProbability of Occurrence0.96-0.260.26O 0.5135%45%20%What is the correlation between stocks X and Z?Stock XExpected Return25%14%4%Stock YExpected Return-10%8%14%Stock ZExpected Return15%25%-10%

State of economyProbability of occurrenceStock X expected returnStock Y expected returnStock Z…

rrent Attempt in Progress State of the Economy Recession Average Boom Probability of Occurrence O 0.96 O -0.26 35% 45% 20% What is the correlation between stocks X and Z? Stock X Expected Return 25% 14% 4% Stock Y Expected Return -10% 8% 14% Stock Z Expected Return 15% 25% -10%

rrent Attempt in Progress State of the Economy Recession Average Boom Probability of Occurrence O 0.96 O -0.26 35% 45% 20% What is the correlation between stocks X and Z? Stock X Expected Return 25% 14% 4% Stock Y Expected Return -10% 8% 14% Stock Z Expected Return 15% 25% -10%

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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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

Current Attempt in Progress
State of the Economy
Recession
Average
Boom
Probability of Occurrence
0.96
-0.26
0.26
O 0.51
35%
45%
20%
What is the correlation between stocks X and Z?
Stock X
Expected Return
25%
14%
4%
Stock Y
Expected Return
-10%
8%
14%
Stock Z
Expected Return
15%
25%
-10%

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% Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP 0 .0413 -.0275 .0231 .0314 Correlation with Market Index 0 0.9953 -0.9953 0.6894 1.0000 Beta 0 1.32 - 0.88 0.74 1.00 CAPM Req. Return 7.00 % 17.54 % -0.02% 12.89% 15.00% Valuation ( Overvalued / Undervalued/Fairly Valued) Valued Fairly…
Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Required A Required B Required C Rate of Return Stocks -7% 22% 33% Stocks Bonds a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Expected Rate of Return 16.4 % 11.4 % Bonds 20% Complete this question by entering your answers in the tabs below. 11% 7% You received partial credit in the previous attempt. Calculate the expected rate of return and standard deviation for each investment. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place. Standard Deviation 12.5 % 13.9 %
Table A State of the Economy Probability 20% Steady Recession 35% Retum in state 7% -3% 15% Table A shows the states of the economy, the probability of being in that state and the return on a particular stock during that state of the economy. What is the expected return of the stock, given the intamallion in the tow 4.10% 6.33% 8.33% None of the answers isted here.
Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 10% -.30 Below Average 20% -.02 Average 40% .10 Above Average 20% .18 Boom 10% .40 Stock A's expected return is A. 7.2% B. 9.6% C. 5.4% D. 8.2%
Consider the following information: State of Economy Recession Expected return Normal .60 Boom 20 Calculate the expected return for Stock A. Expected return Probability of State of Economy Calculate the expected return for Stock B. Standard deviation 20 8.40% 8.02% 8.82% 7.95% 8.74% Standard deviation Calculate the standard deviation for Stock A. 10.20% 8.33% 10.71% 9.69% 10.61% 2.94% 2.08% 3.09% 2.79% 3.06% Calculate the standard deviation for Stock B. 17.42% 12.32% 18.29% 16.55% 18.11% Rate of Return if State Occurs Stock A .03 .09 12 Stock B -.21 N 13 33
None
State of Nature Recession Expansion Probability 70% 30% State Dependent Return A -.08 .28 State Dependent Return B -.04 .16 Given the data in the table above, what comes closest to the standard deviation of Stock A and the standard deviation of Stock B? A. The standard deviation of Stock A = .10 and the standard deviation of Stock B = .1033 B. The standard deviation of Stock A = .10 and the standard deviation of Stock B = .0917 C. The standard deviation of Stock A = .02 and the standard deviation of Stock B =.1033 D. The standard deviation of Stock A = .0000 and the standard deviation of Stock B = .0000 O E. The standard deviation of Stock A = .1650 and the standard deviation of Stock B =.0917
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a 0.07248 b 0.00386 c 0.26921 d 0.00939 e 0.05175
Consider the following information: State of Probability of State of Economy .60 40 Economy Boom Bust Rate of Return If State Occurs Stock A .15 .18 Stock B .23 .08 Stock C .42 -.09 What is the expected return of a portfolio equally invested in stocks A, B, and C? Round to the nearest XX.XX%
% Return on T-Bills, Stocks and Market Index State of the economy Probability T-Bills Phillips Pay -up Rubber-made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 16.9 2.07 19.60 15 Standard Deviation 0 23.4 15.62 18.92 17.71 Coefficient of Variation 0 1.39 7.55 0.97 1.18 Covariance with MP 0 0.04 -0.3 0.02 0.03 Correlation with Market Index 0 1 -1.0 0.69 1 Beta 0 1.32 -0.88 0.74 1 CAPM Req. Return 7 17.54 -0.02 12.89 15.0 Valuation (Overvalued/Undervalued/Fairly valued) Fairly valued Overvalued Undervalued Undervalued Fairly valued Nature of stock Defensive Aggressive Defensive Defensive Defensive Find the mean for T-Bills showing…
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