Consider stocks A, B and C. Assume that you know future returns under four scenarios as...
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Consider stocks A, B and C. Assume that you know future returns under four scenarios as follows. (Assume the data are in decimals; the 0.07 you see is really 7%.) + State of the Economy Very Strong Strong Mild Weak Probability of State 0.25 0.25 0.25 0.25 Return of Stock A 0.07 0.08 0.03 -0.01 Return of Stock B 0.10 0.09 0.02 -0.02 Return of Stock C 0.19 0.14 0.01 -0.10 Risk-Free Return 0.03 0.03 0.03 0.03 Market Return 0.14 0.11 0.01 -0.04 a) Calculate the mean, variance and standard deviation for each stock. Calculate the covariance and correlation between each pair of stocks. Calculate the covariance and correlation between each stock and the market return. Finally, calculate the Capital Asset Pricing Model (CAPM) betas for stocks A, B and C. (Hint: Since the states are equally likely, you can use VARP, COVAR or CORR functions in Excel). b) Calculate the expected return, standard deviation and beta of the portfolio of an investor who invests in a specific portfolio of these stocks. This investor has $83,000 invested. She has invested $55,000 in Stock A and $28,000 in Stock B. Consider stocks A, B and C. Assume that you know future returns under four scenarios as follows. (Assume the data are in decimals; the 0.07 you see is really 7%.) + State of the Economy Very Strong Strong Mild Weak Probability of State 0.25 0.25 0.25 0.25 Return of Stock A 0.07 0.08 0.03 -0.01 Return of Stock B 0.10 0.09 0.02 -0.02 Return of Stock C 0.19 0.14 0.01 -0.10 Risk-Free Return 0.03 0.03 0.03 0.03 Market Return 0.14 0.11 0.01 -0.04 a) Calculate the mean, variance and standard deviation for each stock. Calculate the covariance and correlation between each pair of stocks. Calculate the covariance and correlation between each stock and the market return. Finally, calculate the Capital Asset Pricing Model (CAPM) betas for stocks A, B and C. (Hint: Since the states are equally likely, you can use VARP, COVAR or CORR functions in Excel). b) Calculate the expected return, standard deviation and beta of the portfolio of an investor who invests in a specific portfolio of these stocks. This investor has $83,000 invested. She has invested $55,000 in Stock A and $28,000 in Stock B.
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Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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