Consider the returns of three assets under different states of the economy. State of Economy Probability of
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Consider the returns of three assets under different states of the economy.
State of Economy Probability of State Return of Asset A Return of Asset B Return of Market M
Boom 0.20 40% 22% 17%
Steady 0.50 12% 15% 10%
Recession 0.30 -5% -4% -3%
1) Compute the risks and the expected returns and the of Assets A, B and the Market M.
2) What is the covariance of A and M, and B and M?
3) What are the market betas of A and B?
4) If you were to hold 50% of your portfolio in asset A, and 50% in asset B, what would be the expected return and risk of your portfolio? Comment on the diversification effect of your portfolio.
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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