The table below presents the state-based returns of securities A and B, the risk-free security, and...

Transcribed Image Text:

The table below presents the state-based returns of securities A and B, the risk-free security, and the market portfolio, where p is the probability of each state. Use the information therein to answer parts a and b. P Security A Security B 40% -8% -5% 12% 37% State Recession 0.5 Normal 0.4 Boom 0.1 -18% a. Calculate the expected return and its standard deviation of securities A and B. b. Suppose you borrow $30,000 at the risk-free rate and along with the $60,000 you have, you invest $15,000 in security A and $75,000 in security B. Calculate the expected return, its standard deviation, and the CAPM-implied beta of this portfolio. Risk-free security Market portfolio 3% -6% 3% 22% 3% 32% The table below presents the state-based returns of securities A and B, the risk-free security, and the market portfolio, where p is the probability of each state. Use the information therein to answer parts a and b. P Security A Security B 40% -8% -5% 12% 37% State Recession 0.5 Normal 0.4 Boom 0.1 -18% a. Calculate the expected return and its standard deviation of securities A and B. b. Suppose you borrow $30,000 at the risk-free rate and along with the $60,000 you have, you invest $15,000 in security A and $75,000 in security B. Calculate the expected return, its standard deviation, and the CAPM-implied beta of this portfolio. Risk-free security Market portfolio 3% -6% 3% 22% 3% 32%

Answer rating: 100% (QA)

a To calculate the expected return and standard deviation of securities A and B you can use the foll... View the full answer