(16%) Given the following probability distributions for Stocks A and B, and the market portfolio, M:...
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(16%) Given the following probability distributions for Stocks A and B, and the market portfolio, M: State Probability Return on A Return on B Return on M Bust 0.15 -0.15 0.12 0.25 Normal 0.60 Boom 0.25 -0.10 0.09 0.32 -0.18 0.12 0.26 (a) You construct a 2-stock portfolio by investing $28,000 in Stock A and $12,000 in Stock B. Compute the expected rate of return and variance of the 2-stock portfolio that is composed of Stocks A and B. (b) Given that the beta for stock A is 1.0197, compute the required (CAPM) rate of return on the 2-stock portfolio, given that the risk-free rate and the inflation rate are, respectively, 0.025 and 0.020. Explain your investment recommendation on the 2- stock portfolio according to the CAPM analysis. (Hint: You need to compute the beta for Stock B, given that expected return and standard deviation for the market portfolio are, respectively, 0.1120 and 0.1229!) (16%) Given the following probability distributions for Stocks A and B, and the market portfolio, M: State Probability Return on A Return on B Return on M Bust 0.15 -0.15 0.12 0.25 Normal 0.60 Boom 0.25 -0.10 0.09 0.32 -0.18 0.12 0.26 (a) You construct a 2-stock portfolio by investing $28,000 in Stock A and $12,000 in Stock B. Compute the expected rate of return and variance of the 2-stock portfolio that is composed of Stocks A and B. (b) Given that the beta for stock A is 1.0197, compute the required (CAPM) rate of return on the 2-stock portfolio, given that the risk-free rate and the inflation rate are, respectively, 0.025 and 0.020. Explain your investment recommendation on the 2- stock portfolio according to the CAPM analysis. (Hint: You need to compute the beta for Stock B, given that expected return and standard deviation for the market portfolio are, respectively, 0.1120 and 0.1229!)
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Certainly lets proceed with the calculations a Expected Rate of Return and Variance of the 2Stock Po... View the full answer
Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
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