Question: Consider the following information about two stocks and answer the questions below. We also know that Stock As beta is 1.50 and Stock Bs beta

Consider the following information about two stocks and answer the questions below. We also know that Stock As beta is 1.50 and Stock Bs beta is .80.

State of Economy

Probability of State

Return if State Occurs

Stock A

Stock B

Boom

.30

.25

.14

Normal

.40

.15

.12

Recession

.30

-.15

.07

(a) [6 points] What would be the expected returns of Stock A and Stock B?

(b) [6 points] What would be the standard deviation of a portfolio that is equally invested in the two assets?

(c) [8 points] If a portfolio of the two assets has a beta of 1.20, what would be the expected return of the portfolio?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

The Stone River Textile Mill was inspected by OSHA and found to be in violation of a number of safety regulations. The OSHA inspectors ordered the mill to alter some existing machinery to make it...

Q:

SUBJECT : PRINCIPLE OF FINANCE b. Consider the following information about three stocks: State of Economy Boom Recession Probability of State of Economy 0.40 0.60 Rate of Return if State Occurs Stock...

Q:

(10 points) Suppose that CAPM holds and that there are two possible states of the economy in the next month: Boom and Bust. The probability of a boom is 75%. Consider the following information about...

Q:

Suppose that CAPM holds and that there are two possible states of the economy in the next year: Good and Bad. The probability of the bad state is 20%. Consider the following information about two...

Q:

2. Suppose that CAPM holds and that there are two possible states of the economy in the next month: Boom and Bust. The probability of a boom is 75%. Consider the following information about two...

Q:

CAPM holds and that there are two possible states of the economy in the next month: Boom and Bust. The probability of a bust is 10%. Consider the following information about two stocks X and Y: -...

Q:

Question 1 1 pts Orlando Nursing Home, an investor-owned healthcare organization, recently reported $345,900 of revenues, $213,000 of operating costs other than depreciation, and $12,500 of...

Q:

Question 1 Mr. Kiwat borrowed GH200,000 from his bankers to buy his dream house. Repayment is over 4 years and first payment is due one year from hence. He will make equal payments to amortize both...

Q:

Consider the following information about three stocks: Rate of Return If State Occurs Probability of State of Economy .25 State of Economy Boom Normal Bust Stock A .13 .08 .02 Stock B .29 .11 -.18...

Q:

ANswer all the questions correctly. Task 01. 3 An Anticipated Output Shock [30 points] Consider a two-period small open endowment economy populated by a large number of households with preferences...

Q:

A stock has a beta of 1.1, the expected return on the market is 17 percent, and the risk-free rate is 10.2 percent. What must the expected return on this stock be? Multiple Choice 18.39% 28.9% 18.56%...

Q:

Martin Corporation, a U.S. import???export firm, enters into a forward contract on October 2, 2011, to speculate in euros. The contract requires Martin to deliver 1,000,000 euros to the exchange...

Q:

Identify issues that could be a source of conflict between account managers and advertising creatives in the message-testing process. What could go wrong if people in an ad agency take the position...

Q:

2. What will the following code display in the lblSum control? Dim intSum As Integer Dim intY As Integer Do While intY

Q:

Archer Company produces two products: the custom and the basic. The custom sells for $30, and the basic sells for $8. Projected sales of the two models for the coming four quarters are given below....