You are given the following information: State of Economy Bear Normal Bull Return on Stock A 114 103 085 Return on Stock B -.057 160 245 Assume each state of the economy is equally likely to happen. a. Calculate the expected return of each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of each stock. (Do not round intermediate mal
You are given the following information: State of Economy Bear Normal Bull Return on Stock A 114 103 085 Return on Stock B -.057 160 245 Assume each state of the economy is equally likely to happen. a. Calculate the expected return of each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of each stock. (Do not round intermediate mal
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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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:You are given the following information:
State of
Economy
Bear
Normal
Bull
Return on
Stock A
a.
Stock A
Stock B
b. Stock A
Stock B
114
103
085
Assume each state of the economy is equally likely to happen.
a. Calculate the expected return of each stock. (Do not round intermediate calculations
and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
b. Calculate the standard deviation of each stock. (Do not round intermediate
calculations and enter your answers as a percent rounded to 2 decimal places, e.g.,
32.16.)
c. What is the covariance between the returns of the two stocks? (A negative answer
should be indicated by a minus sign, Do not round intermediate calculations and
round your answer to 6 decimal places, e.g., .161616.)
d. What is the correlation between the returns of the two stocks? (A negative answer
should be indicated by a minus sign, Do not round intermediate calculations and
round your answer to 4 decimal places, e.g., .1616.)
Return on
Stock B
C.
Covariance
d. Correlation
-.057
160
245
%
%
%
%
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