There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if the economy is normal, and $98 if the economy is expanding. The probabilities of recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays no dividends and has a correlation of .71 with the market portfolio. Stock B has an expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has a standard deviation of 18.1 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.)
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if the economy is normal, and $98 if the economy is expanding. The probabilities of recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays no dividends and has a correlation of .71 with the market portfolio. Stock B has an expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has a standard deviation of 18.1 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.)
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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Transcribed Image Text:There are two stocks in the market, Stock A and Stock B. The price of Stock A today is
$76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if
the economy is normal, and $98 if the economy is expanding. The probabilities of
recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays
no dividends and has a correlation of .71 with the market portfolio. Stock B has an
expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with
the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has
a standard deviation of 18.1 percent. Assume the CAPM holds.
a-1.What is the return for each state of the economy for Stock A? (A negative answer
should be indicated by a minus sign. Do not round intermediate calculations and
enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
a- What is the expected return of Stock A? (Do not round intermediate calculations
2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a- What is the variance of Stock A? (Do not round intermediate calculations and round
3. your answer to 4 decimal places, e.g., .1616.)
a- What is the standard deviation of Stock A? (Do not round intermediate calculations
4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a- What is the beta of Stock A? (Do not round intermediate calculations and round
5. your answer to 3 decimal places, e.g., 32.161.)
a- What is the beta of Stock B? (Do not round intermediate calculations and round
6. your answer to 3 decimal places, e.g., 32.161.)
a-1. Recession
a-1. Normal
-14.47 %
15.79%
a-1. Expansion
a-2. Expected return
a-3. Variance
a-4. Standard deviation
a-5. Beta of Stock A
28.95%
%
0.0105
10.23%
0.400
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