Principles of Finance 13

Consider the following information:

 

    Rate of Return If State Occurs
  State of Probability of
  Economy State of Economy Stock A Stock B
  Recession   .22     .07   .22  
  Normal   .52     .10     .07  
  Boom   .26     .15     .24  

 

Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Expected return
  Stock A  %
  Stock B  %

 

Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Standard deviation
  Stock A  %
  Stock B  %
You own a stock portfolio invested 35 percent in Stock Q, 30 percent in Stock R, 20 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are .92, 1.25, 1.09, and 1.27, respectively. What is the portfolio beta? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

 

  Portfolio beta  
A stock has an expected return of 15.5 percent, its beta is 1.55, and the expected return on the market is 12.2 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Risk-free rate  %

Stock Y has a beta of 1.0 and an expected return of 12.4 percent. Stock Z has a beta of .6 and an expected return of 8.2 percent. If the risk-free rate is 5.2 percent and the market risk premium is 6.4 percent, the reward-to-risk ratios for stocks Y and Z are  and  percent, respectively. Since the SML reward-to-risk is  percent, Stock Y is  and Stock Z is . (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Given this information, fill in the rest of the following table: (Do not round intermediate calculations. Round your answers to the nearest whole number, e.g., 32.)

 

  Asset Investment Beta
  Stock A $ 156,000   1.20  
  Stock B $ 276,000   1.40  
  Stock C $   1.50  
  Risk-free asset $      

(Click to select)

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