Consider the economy with only two risky assets: stock A and B. There are three possible...

     

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Consider the economy with only two risky assets: stock A and B. There are three possible scenarios for the economy (equal probability of each scenario) and the returns in each scenario for the market portfolio, stock A and B are the following: Scenario Market Bust -10% Normal Boom 10% 30% Rates of Return Stock A Stock B -15% 20% 15% 5% 45% -10% a) Find expected rate of return and total risk on market portfolio and on both stocks. b) Find the beta of each stock and comment of their values. (30 marks) (20 marks) c) Assume that the T-bill rate is 5%. Write down the CAPM equation and explain it. What does the CAPM say about the fair expected rate of return on the two stocks? (30 marks) d) Which of stock seems to be a good buy on the basis of your answers to a), b) and c)? Explain your answer. Consider the economy with only two risky assets: stock A and B. There are three possible scenarios for the economy (equal probability of each scenario) and the returns in each scenario for the market portfolio, stock A and B are the following: Scenario Market Bust -10% Normal Boom 10% 30% Rates of Return Stock A Stock B -15% 20% 15% 5% 45% -10% a) Find expected rate of return and total risk on market portfolio and on both stocks. b) Find the beta of each stock and comment of their values. (30 marks) (20 marks) c) Assume that the T-bill rate is 5%. Write down the CAPM equation and explain it. What does the CAPM say about the fair expected rate of return on the two stocks? (30 marks) d) Which of stock seems to be a good buy on the basis of your answers to a), b) and c)? Explain your answer.

Answer rating: 100% (QA)

a To find the expected rate of return and total risk on the market portfolio and both stocks we need to calculate the weighted average of their returns and risks based on the given scenarios and proba... View the full answer