You have been give this Probability distribution for the expected return of Stocks Bonds Recession 0.25 -4.5% - 2%% Normal growth 0.45 5% 4% Boom 0.30 15% 7% a. Calculat the expected rate of return of stock and bond b. Calculate the standard deviation for each investment? c. Compute the coefficient of variation? d. If an investor allocate 60% of asset t stock and remaining to bond, what would be the investor's portfolio returns and standard deviation? e. Is there any diversification benefit achived?
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You have been give this Probability distribution for the expected return of Stocks Bonds Recession 0.25 -4.5% - 2%% Normal growth 0.45 5% 4% Boom 0.30 15% 7% a. Calculat the expected
deviation? e. Is there any diversification benefit achived?
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- What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).Bond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables If D1 = $1.50 g (which is constant) = 6.5%, Po = $56, what is the stock's expected capital gains yield for the coming year?a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of…
- Bond valuation related problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables If D1 = $1.25, g(which is constant) = 4.7%, and Po= $26.00 what is the stocks expected dividend yield for the coming year?You have been given this probability distribution for the Expected Return of Stock and Bond Status of economy Probability rate of Stock return Bond return return 0.25 0.5 0.30 Recession Normal growth Boom -4.5% 5% 15% (iv) What is the expected rate of return of stock and bonds? (v) Compute the standard deviation of stock and bonds returns? (vi) Compute the coefficient of variation? -2% 4% 7% (vii) If an investor allocates 60% of asset to stock and remaining to bond, what would be the investor's portfolio returns and standard deviation? (viii) Is there any diversification benefit achieved?Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Expected Return Standard Stock Deviation 25% 75% A 6% B 10% Correlation =-1 a. Calculate the expected rate of return on the risk-free portfolio? (Hint: Try to construct a risk-free portfolio using stocks A and B.) (Enter your answer as a percentage rounded to 2 decimal places.) Expected rate of return b. Could the equilibrium rf be greater than, equal to, or less than your answer in #a? greater than equal to less than
- a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance…The payoff table below indicates the returns (in RM thousands) of investments in stock, bond and fixed deposit under different economic situations. Type of Investment Stock Bond Fixed Deposit Table 1 Economic Situation Good 150 50 45 Stable 60 40 45 Poor -30 36 45 The probabilities of good, stable and poor economy are 0.3, 0.5 and 0.2, respectively. What is the best investment based on the expected monetary value criterion? Draw a decision tree.b) You are given the following information about Stock X and the market: The annual effective risk-frec rate is 5%. The expected return and volatility for Stock X and the market are shown in the table below: Expected Return Volatility Stock X 5% 40% Market 8% 25% The correlation between the returns of stock X and the market is -0.25. Assume the Capital Asset Pricing Model holds. Calculate the required return for Stock X and determine if the investor should invest in Stock X.
- Consider the following simplified APT model: Factor Market Expected Risk Premium (%) Interest rate Yield spread 6.2 -0.8 4.8 Factor Risk Exposures Market ( Interest Rate ( Yield Spread ( Stock b₁ ) P 1.0 p2 1.0 p3 0.3 b2 ) -1.4 0 2.1 b3 ) -0.6 0.1 0.6 = : 3.8%. Calculate the expected return for each of the stocks shown in the table above. Assume rf Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Expected return P 7.80% Expected return P2 10.38% Expected return P3 %Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.2 -5% 17% Normal economy 0.6 18 11 Boom 0.2 24 4 Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds. a. What is the rate of return on the portfolio in each scenario? (Enter your answer as a percent rounded to 1 decimal place.) b. What are the expected rate of return and standard deviation of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)Following are the probability distribution of returns of portfolio of Stock A and Stock B in equal proportion of weight in each state of economy. You are required to calculate Expected Return and Risk for individual Stocks? State of Economy 1 2 3 4 5 Probability 0.2 0.2 0.2 0.2 0.2 Return on Stock A (%) 15 (5) 5 35 25 Return on Stock B (%) (5) 15 25 5 35 If you deposit Rs. 1,000 in the bank at a nominal interest rate of 6 percent, you will have Rs. 1,060 at the end of the year. Suppose that the inflation rate during the year is also 6 percent. Find real amount in Peso?