+ Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a...

 

Transcribed Image Text:

+ Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a beta of 1.2. Market risk premium is 8% and risk-free rate is 6%. + + The followings are the probability distributions of Stocks X and Y's future returns.+ State of Economy II + Probability Ix Recession 0.1 -10% -35%+ Below average 0.2 2% 0+ Average 0.4 12% 20%+ Above average Boom 0.2 20% 25%+ 0.1 38% 45%+ 1. Calculate the portfolio's expected rate of return and the standard deviation of its future returns+ 2. Calculate the required rate of return of your portfolio.+ 3. Which stock in your portfolio is currently under-valued? Explain. < + Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a beta of 1.2. Market risk premium is 8% and risk-free rate is 6%. + + The followings are the probability distributions of Stocks X and Y's future returns.+ State of Economy II + Probability Ix Recession 0.1 -10% -35%+ Below average 0.2 2% 0+ Average 0.4 12% 20%+ Above average Boom 0.2 20% 25%+ 0.1 38% 45%+ 1. Calculate the portfolio's expected rate of return and the standard deviation of its future returns+ 2. Calculate the required rate of return of your portfolio.+ 3. Which stock in your portfolio is currently under-valued? Explain. <