5. There are three possible scenarios for the economy over the next year, Below Average, Average,...

 

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5. There are three possible scenarios for the economy over the next year, Below Average, Average, or Above Average. The possible returns on two stocks, on the stock market, and on Treasury Bills under the different scenarios are given below: [12 Marks] Economy Probability Stock 1 Stock 2 return Return to Returm to retum Stock T-Bills market Above 0.3 -7% 4% 0% Average Average 0.4 9% 12% 4% 10% Below 0.3 10% 22% 4% 20% Average a. What is the beta of a portfolio that has $2000 invested in stock 1, $4500 invested in stock 2, and $3000 invested in Treasury Bills? b. If you invest in a portfolio of just the two stocks (i.e. no T-Bills), what proportion of your money should be invested in cach stock in order for your portfolio to have the same level of systematic risk as the stock market on average? 5. There are three possible scenarios for the economy over the next year, Below Average, Average, or Above Average. The possible returns on two stocks, on the stock market, and on Treasury Bills under the different scenarios are given below: [12 Marks] Economy Probability Stock 1 Stock 2 return Return to Returm to retum Stock T-Bills market Above 0.3 -7% 4% 0% Average Average 0.4 9% 12% 4% 10% Below 0.3 10% 22% 4% 20% Average a. What is the beta of a portfolio that has $2000 invested in stock 1, $4500 invested in stock 2, and $3000 invested in Treasury Bills? b. If you invest in a portfolio of just the two stocks (i.e. no T-Bills), what proportion of your money should be invested in cach stock in order for your portfolio to have the same level of systematic risk as the stock market on average?

Answer rating: 100% (QA)

Expected Returns on stock 1 and on stock 2 can be calculated using probabilities of type of economy and returns during that type of economy For eg pro... View the full answer