Johnny has $400,000 to invest and is considering the merits of two stocks: HCBC & SBB....
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Johnny has $400,000 to invest and is considering the merits of two stocks: HCBC & SBB. The two stocks have the following possible expected future returns: State of Affair Boom Probability 0.4 Normal 0.4 Recession 0.2 HCBC 40% 15% -10% SBB -15% 10% 25% Johnny plans to invest 60% of his $400,000 in HCBC and the remainder in SBB. (a) Calculate the expected rate of return, variance and standard deviation of HCBC & SBB. (12 marks) (b) Assume that the covariance between HCBC and SBB is -0.012 (or -120%²). Calculate the expected rate of return, variance and standard deviation of Johnny's portfolio. (6 marks) (c) Suppose the risk-free rate is 6%, the market risk premium is 12%. Given the beta for HCBC is 1 and SBB is 0.5. Using the CAPM model, estimate the required rates of return of HCBC and SBB. (2 marks) (d) Given the results above, determine whether HCBC and SBB are mis-priced (i.e., over, fairly or under-priced). Which stock should Johnny invest? Explain. (5 marks) Johnny has $400,000 to invest and is considering the merits of two stocks: HCBC & SBB. The two stocks have the following possible expected future returns: State of Affair Boom Probability 0.4 Normal 0.4 Recession 0.2 HCBC 40% 15% -10% SBB -15% 10% 25% Johnny plans to invest 60% of his $400,000 in HCBC and the remainder in SBB. (a) Calculate the expected rate of return, variance and standard deviation of HCBC & SBB. (12 marks) (b) Assume that the covariance between HCBC and SBB is -0.012 (or -120%²). Calculate the expected rate of return, variance and standard deviation of Johnny's portfolio. (6 marks) (c) Suppose the risk-free rate is 6%, the market risk premium is 12%. Given the beta for HCBC is 1 and SBB is 0.5. Using the CAPM model, estimate the required rates of return of HCBC and SBB. (2 marks) (d) Given the results above, determine whether HCBC and SBB are mis-priced (i.e., over, fairly or under-priced). Which stock should Johnny invest? Explain. (5 marks)
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a Expected Rate of return HCBC 04 40 04 15 02 10 16 SBB 04 15 04 10 02 25 ... View the full answer
Related Book For
South-Western Federal Taxation 2020 Comprehensive
ISBN: 9780357109144
43rd Edition
Authors: David M. Maloney, William A. Raabe, James C. Young, Annette Nellen, William H. Hoffman
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