There are two stocks in the market, stock A and stock B. The price of stock A today is $82. The price of stock A next year will be $73 if the economy is in a recession, $93 if the economy is normal, and $105 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 0.88. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.65, 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? O Stock A Stock B c. What are the expected return and standard deviation of a portfolio consisting of 50% of stock A and 50% 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 $82. The price of stock A next year will be $73 if the economy is in a recession, $93 if the economy is normal, and $105 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 0.88. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.65, 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? O Stock A Stock B c. What are the expected return and standard deviation of a portfolio consisting of 50% of stock A and 50% 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
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
Question
24) can i get help with this
Transcribed Image Text:There are two stocks in the market, stock A and stock B. The price of stock A today is $82. The price of stock A next year will be $73 if
the economy is in a recession, $93 if the economy is normal, and $105 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 0.88. Stock B has an
expected return of 13%, a standard deviation of 34%, a beta of 0.65, 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?
O Stock A
O Stock B
c. What are the expected return and standard deviation of a portfolio consisting of 50% of stock A and 50% 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
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 5 steps with 7 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