QUESTION 1 An analyst estimates that a stock has the following return probabilit
ID: 2777327 • Letter: Q
Question
QUESTION 1
An analyst estimates that a stock has the following return probabilities and returns depending on the state of the economy. Calculate the percentage expected rate of returns.
Stae of Economy
Prob.
Return
Good
0.1
19%
Normal
0.3
14
Poor
?
4
QUESTION 2
Use the following table of states of the economy and stock returns to calculate the percentage standard deviation for Bradley.
Security Returns
if State Occurs
Prob of State of Economy
Roten
Bradley
Bust
0.6
-10%
35.3%
Boom
?
40
5.8
QUESTION 3
Use the following table of states of the economy and stock returns to calculate the expected return on a portfolio of 53 percent Roten and the rest in Bradley.
Security
if State
Returns
Occurs
Prob of State of Economy
Roten
Bradley
Bust
0.5
-9%
32%
Boom
?
35
7
QUESTION 4
Use the following table of states of the economy and stock returns to calculate the percentage standard deviation of a portfolio of a portfolio of 80 percent Roten and the rest in Bradley.
Security
if State
Returns
Occurs
Prob of State of Economy
Roten
Bradley
Bust
0.2
-12%
30%
Boom
?
37
5
QUESTION 5
Use the following information to calculate the percentage expected return a portfolio that is 47.5 percent invested in 3 Doors, Inc., and the rest invested in Down Co.:
3 Dorrs, Inc.
Down Co.
Expected return
28%
5%
Standard deviation
35
11
Correlation
72
QUESTION 6
Use the following information to calculate the percentage standard deviation of a portfolio that is 61.4 percent invested in 3 Doors, Inc., and the rest invested in Down Co.:
3 Dorrs, Inc.
Down Co.
Expected return
16%
11%
Standard deviation
41
33
Correlation
0.76
Stae of Economy
Prob.
Return
Good
0.1
19%
Normal
0.3
14
Poor
?
4
Explanation / Answer
1)
probability of poor economy = 1-0.1-0.3 =0.6
expected return = 0.1 * 19% + 0.3 * 14% + 0.6 * 4% = 8.5%
2)
E(X) = 0.6 * 35.3% + 0.4 * 5.8% = 23.5%
E(X^2) = 0.6 * 35.3%^2 + 0.4 * 5.8%^2
standard deviation = sqrt ( E(X^2) - E(X)^2)
= 14.45%
3)
expected return of roten = 0.5 * -9% + 0.5 * 35% = 13%
expected return of bradley = 0.5 * 32% + 0.5 * 7% = 19.5%
expected return of portifolio = 0.53 * 13% + 0.47 * 19.5% = 16.055%
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