Consider the following information and answer the questions.

a. Calculate the expected return of each stock.

b. Calculate the variance and standard deviation of each stock.

c. Calculate the expected return of the portfolio (Portfolio1) consisting 40% of stock A, 40% of stock B and 20% of stock C.

d. Calculate the variance and standard deviation of this portfolio.

e. Consider an alternative portfolio (Portfolio2) 40% of stock A, 20% of stock B, 10% of stock C and 30% in the risk-free asset. Risk-free asset expected return is 2%. What is this portfolio?s expected return, variance, and standard deviation?

f. Based on CAPM calculate each stock beta if market risk premium is 5%.

g. Which stock has the lowest systematic risk? Which stock has the lowest total risk? Which stock is ?safest?? Explain.

h. What is the beta of the Portfolio1 and Portfolio2?

Transcribed Image Text:

boom good poor bust Probability of the state of economy 0,2 0,3 0,4 0,1 Rate of return if state occurs StockA StockB StockC -0,04 0,12 0,05 0,08 0,1 0,02 0,14 0 0,4 0,2 0,04 -0,06 boom good poor bust Probability of the state of economy 0,2 0,3 0,4 0,1 Rate of return if state occurs StockA StockB StockC -0,04 0,12 0,05 0,08 0,1 0,02 0,14 0 0,4 0,2 0,04 -0,06

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a Calculate the expected return of each stock b Calculate the variance and standard deviation of each stock c Calculate the expected return of the portfolio Portfolio1 consisting 40 of stock A 40 of s... View the full answer