There are two stocks in the market, stock A and stock B. The price of stock A today is $66. The price of stock A next year will be $54 if the economy is in a recession, $74 if the economy is normal, and $86 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a beta of 0.69. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.46, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds. a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Stock A Expected return % Standard deviation % b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? multiple choice Stock A Stock B c. What are the expected return and standard deviation of a portfolio consisting of 40% of stock A and 60% of stock B? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected return % Standard deviation % d. What is the beta of the portfolio in (c)? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Beta of the portfolio
There are two stocks in the market, stock A and stock B. The price of stock A today is $66. The price of stock A next year will be $54 if the economy is in a recession, $74 if the economy is normal, and $86 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a beta of 0.69. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.46, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds.
a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
| Stock A | |
| Expected return | % |
| Standard deviation | % |
b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer?
multiple choice
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Stock A
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Stock B
c. What are the expected return and standard deviation of a portfolio consisting of 40% of stock A and 60% of stock B? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
| Expected return | % |
| Standard deviation | % |
d. What is the beta of the portfolio in (c)? (Do not round intermediate calculations. Round the final answer to 3 decimal places.)
Beta of the portfolio
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