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%

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%

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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4
Consider the following table for different assets for 1926 through 2020. Standard Deviation 19.7% Series Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds Intermediate-term government bonds U.S. Treasury bills Inflation Average return 12.2% 16.2 6.5 6.1 5.3 3.3 2.9 Expected range of returns Expected range of returns a. What range of returns would you expect to see 68 percent of the time for large-company stocks? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. What about 95 percent of the time? 31.3 8.5 9.8 Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. % to % to 5.6 3.1 4.0 % %
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Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 -7% 18% Normal economy Boom 0.60 20% 0.10 26% 10% 3% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Complete this question by entering your answers in the tabs below. Required A Required B Required C Calculate the expected rate of return and standard deviation for each investment. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place. Expected Rate of Return Stocks 12.5% Bonds 11.7 % Standard Deviation % %
Consider the folloving scenario analysis: Rate of Return Scenario Recession Probability Stocks Bonds 194 0.20 -4 Normal economy Boom 0.40 204 268 9 0.40 a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No Yes O b. Calculate the expected rate of return and standard deviation for each investment. (Do not round Intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)
Listed below is the return probability distribution associated with the stocks of XYZ Company and the market portfolio under different states of the economy: State Recession Normal Boom 0.00452 O 0.00552 0.00652 Probability O 0.00752 0.4 0.3 0.3 XYZ Return What is the covariance between XYZ return and Market return? -3% 14% 20% Market Return 2% 8% 16%
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Consider the following scenario analysis: Rate of Return Stocks Scenario Bonds Probability 0.20 Recession -6% 18% Normal economy 0.50 19% 11% Boom 0.30 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No Ⓒ Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Standard Deviation Return Stocks 16.1 % % Bonds 9.7 % % c. Which investment would you prefer? Bond Which investment would you prefer? Stock
Read the information for 3 stocks X, Y and Z below. Rate of return when state occurs (For Stock X, Y, and Z) State of Economy Probability of State Stock X Stock Y Stock Z Boom 0.3 0.4 0.45 0.6 Normal 0.5 0.2 0.15 0.08 Recession 0.2 0 -0.3 -0.4 If your portfolio includes 35 percent of X, 40 percent of Y and 25 percent of Z, answerthe following questions: (a) Calculate the portfolio expected return.(b) Calculate the variance and the standard deviation of the portfolio (c) If the expected T-bill rate is 3.80 percent, calculate the expected risk premiumon the portfolio.
Suppose your expectations regarding the stock market are as follows: State of the Economy Boom Normal growth Recession Probability 0.3 0.6 0.1 Mean Standard deviation HPR 24.90 % % 41% 24 E (r) E-1P(s)r (s) Var (r) = o² = s-1p(s)[r (s) - E(r)]² SD (r) = o = √Var (r) Required: Use above equations to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculation Round your answers to 2 decimal places.) -18 K
2
Consider the following information: Economy Recession Normal Boom Probability of State of Economy .21 .56 .23 Rate of Return if State Occurs Stock A Stock B a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B .015 .095 .250 a. Calculate the expected return for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. -.36 .26 .49 b. Calculate the standard deviation for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. % % %

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