EBK 3N3-EBK: FINANCIAL ANALYSIS WITH MI
8th Edition
ISBN: 9780176914943
Author: Mayes
Publisher: VST
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a. Compute the expected return for stock X and for stock Y
b. Compute the standard deviation for stock X and for stock Y.
c. Determine the best course to take for investing.
Assume that the stock market will be decreasing for the year and you are interested in investing in one of the following stocks.
The two stocks are:
Stock ABC with a Beta of 1.75
Stock 123 with a Beta of -0.8
If you want to maximize the value of the investment which stock should you acquire. Please explain.
You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns:
Year r ̄A r ̄B
2014 -20.00% -5.00%
2016 42.00 15.00
2017 20.00 -13.00
2018 -8.00 50.00
2019 25.00 12.00
Calculate the average rate of return for each stock during the 5-year period.
Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period?
Calculate the standard deviation of returns for each stock and for the portfolio.
Suppose you are a risk-averse investor. Assuming Stocks A and B are your only choices, would you prefer to hold Stock A, Stock B,…
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- Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 50% of the dollar value of the portfolio, and stock M will account for the other 50%. The historical returns over the next 6 years, 2013−2018,for each of these stocks are shown in the following table: (see attached table) d. How would you characterize the correlation of returns of the two stocks L and M? e. Discuss any benefits of diversification achieved by Jamie through creation of the portfolio.arrow_forwardYou are considering two stocks and have determined the following information (refer to image): a. Which of the two stocks has the higher expected return?b. Which stock is riskier?c. Given your answers to the two previous questions, what stock is preferred?arrow_forwardSuppose Megan owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Megan’s portfolio value consists of Happy Dog Soap’s shares, and the remaining balance consists of Black Sheep Broadcasting’s shares. Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Expected Returns Occurrence HDS BSB Strong 20% 50% 70% Normal 35% 30% 40% Weak 45% -40% -50% Calculate the expected returns for the individual stocks in Megan’s portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year. • The expected rate of return on Happy Dog Soap’s stock over the next year is . • The expected rate of return on Black Sheep Broadcasting’s stock over the next…arrow_forward
- A. Mubita is contemplating on investing in Stocks A and B with the following probability distributions of possible future returns: Probability (Pi ). 0.1, 0.2, 0.4, 0.2, 0.1 Stock A (%) 15, 0, 5, 10, 25 Stock B (%) 20, 10, 20, 30,50 Calculate the expected rate of return for each stock. Assuming the Capital Asset Pricing Model (CAPM) holds and stock B’s beta is greater than stock A’s beta by 0.27, what is the excess return on the market portfolio?arrow_forwardSuppose that we wanted to sum the 2007 returns on ten shares to calculate the return on a portfolio over that year. What method of calculating the individual stock returns would enable us to do this? Select one: a. Simple b. Neither approach would allow us to do this validly c. Either approach could be used, and they would both give the same portfolio return d. Continuously compoundedarrow_forwardAs an investor you have a required rate of return of 14 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information as below: (i) Use the dividend-growth model to estimate the value of each stock. Justify which (if any) should you buy.(ii) If you purchased Stock A, determine your implied rate of return.(iii) Determine the price that would be required to persuade you to purchase Stock A if your required rate of return were 10%.arrow_forward
- help answer the question in the imagearrow_forwardYou are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below. Probability 0.1 0.2 0.4 0.3 a. Compute the expected return for stock X and for stock Y. The expected return for stock X is (Type an integer or a decimal. Do not round.) Economic Condition Recession Slow growth Moderate growth Fast growth Returns Stock X Stock Y - 40 30 80 150 - 110 40 140 210arrow_forwardWINNER plans to invest in one of two stocks, each of which requires the same initial investment. The estimated return (cash flow) of these investments for the next year depends on economic conditions and their respective possibilities. State of Economy Probability Rate of Return Stock A Stock B Boom 0.15 0.30 0.25 Normal 0.55 0.12 0.08 Recession 0.30 0.01 -0.05 i) Compute expected rate of return for each asset. ii) Compute variance and standard deviation of rate of return for each asset. iii) Which asset should they purchase?arrow_forward
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